UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM10-Q
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended SeptemberJune 30, 2018 2019
or
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number1-6747
The Gorman-Rupp Company
(Exact name of registrant as specified in its charter)
Ohio | 34-0253990 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
600 South Airport Road, Mansfield, Ohio | 44903 | |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code(419) 755-1011
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading | Name of each exchange | ||
Common Shares, without par value | GRC | New York Stock Exchange |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of RegulationS-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ☐ | Accelerated filer | ☒ | |||
Non-accelerated filer | ☐ | Smaller reporting company | ☐ | |||
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act). Yes ☐ No ☒
ThereOn July 26, 2019, there were 26,117,04526,133,393 common shares, of common stock, without par value, outstanding at October 26, 2018.of The Gorman-Rupp Company outstanding.
The Gorman-Rupp Company
Three and ninesix months ended SeptemberJune 30, 20182019 and 20172018
2
ITEM 1—FINANCIAL STATEMENTS (UNAUDITED)
CONSOLIDATEDSTATEMENTSCONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||
(Dollars in thousands, except per share amounts) | 2018 | 2017 | 2018 | 2017 | 2019 | 2018 | 2019 | 2018 | ||||||||||||||||||||||||
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Net sales | $ | 102,893 | $ | 93,976 | $ | 311,324 | $ | 284,451 | $ | 108,330 | $ | 111,827 | $ | 205,189 | $ | 208,431 | ||||||||||||||||
Cost of products sold | 75,566 | 67,518 | 227,926 | 208,496 | 80,138 | 81,962 | 153,684 | 152,360 | ||||||||||||||||||||||||
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Gross profit | 27,327 | 26,458 | 83,398 | 75,955 | 28,192 | 29,865 | 51,505 | 56,071 | ||||||||||||||||||||||||
Selling, general and administrative expenses | 14,207 | 14,122 | 43,435 | 41,800 | 14,988 | 14,872 | 29,351 | 29,228 | ||||||||||||||||||||||||
Impairment of goodwill and other intangible assets | — | 4,098 | — | 4,098 | ||||||||||||||||||||||||||||
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Operating income | 13,120 | 8,238 | 39,963 | 30,057 | 13,204 | 14,993 | 22,154 | 26,843 | ||||||||||||||||||||||||
Other income (expense), net | 532 | (281 | ) | (1,069 | ) | (2,973 | ) | 231 | (2,407 | ) | 523 | (1,601 | ) | |||||||||||||||||||
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Income before income taxes | 13,652 | 7,957 | 38,894 | 27,084 | 13,435 | 12,586 | 22,677 | 25,242 | ||||||||||||||||||||||||
Income taxes | 2,951 | 2,255 | 8,403 | 8,469 | 2,955 | 2,413 | 4,975 | 5,452 | ||||||||||||||||||||||||
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Net income | $ | 10,701 | $ | 5,702 | $ | 30,491 | $ | 18,615 | $ | 10,480 | $ | 10,173 | $ | 17,702 | $ | 19,790 | ||||||||||||||||
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Earnings per share | $ | 0.41 | $ | 0.22 | $ | 1.17 | $ | 0.71 | $ | 0.40 | $ | 0.39 | $ | 0.68 | $ | 0.76 | ||||||||||||||||
Cash dividends per share | $ | 0.125 | $ | 0.115 | $ | 0.375 | $ | 0.345 | $ | 0.135 | $ | 0.125 | $ | 0.270 | $ | 0.250 | ||||||||||||||||
Average number of shares outstanding | 26,117,045 | 26,106,623 | 26,110,484 | 26,098,925 | 26,124,216 | 26,107,670 | 26,121,568 | 26,107,149 |
See notes to consolidated financial statements (unaudited).
CONSOLIDATED STATEMENTSOFSTATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||
(Dollars in thousands) | 2018 | 2017 | 2018 | 2017 | 2019 | 2018 | 2019 | 2018 | ||||||||||||||||||||||||
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Net income | $ | 10,701 | $ | 5,702 | $ | 30,491 | $ | 18,615 | $ | 10,480 | $ | 10,173 | $ | 17,702 | $ | 19,790 | ||||||||||||||||
Other comprehensive income, net of tax: | ||||||||||||||||||||||||||||||||
Cumulative translation adjustments | 118 | 1,255 | (1,549 | ) | 3,119 | 583 | (1,855 | ) | 431 | (1,666 | ) | |||||||||||||||||||||
Pension and postretirement medical liability adjustments, net of tax | 308 | 472 | 2,739 | 3,028 | ||||||||||||||||||||||||||||
Pension and postretirement medical liability adjustments | 378 | 1,921 | 694 | 2,431 | ||||||||||||||||||||||||||||
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Other comprehensive income | 426 | 1,727 | 1,190 | 6,147 | 961 | 66 | 1,125 | 765 | ||||||||||||||||||||||||
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Comprehensive income | $ | 11,127 | $ | 7,429 | $ | 31,681 | $ | 24,762 | $ | 11,441 | $ | 10,239 | $ | 18,827 | $ | 20,555 | ||||||||||||||||
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See notes to consolidated financial statements (unaudited).
3
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Thousands of dollars) | September 30, 2018 | December 31, 2017 | ||||||||||||||
(Dollars in thousands) | June 30, 2019 | December 31, 2018 | ||||||||||||||
Assets | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 101,381 | $ | 79,680 | $ | 62,165 | $ | 46,458 | ||||||||
Accounts receivable, net | 72,662 | 67,369 | 75,476 | 67,714 | ||||||||||||
Inventories, net | 82,044 | 74,967 | 78,809 | 87,387 | ||||||||||||
Prepaid and other | 5,501 | 5,918 | 4,411 | 7,127 | ||||||||||||
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Total current assets | 261,588 | 227,934 | 220,861 | 208,686 | ||||||||||||
Property, plant and equipment, net | 113,466 | 117,071 | 110,526 | 113,493 | ||||||||||||
Other assets | 4,261 | 7,779 | 9,307 | 5,101 | ||||||||||||
Prepaid pension assets | 7,954 | 4,313 | 4,269 | 4,817 | ||||||||||||
Goodwill and other intangible assets, net | 36,542 | 37,918 | 35,633 | 36,185 | ||||||||||||
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Total assets | $ | 423,811 | $ | 395,015 | $ | 380,596 | $ | $368,282 | ||||||||
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Liabilities and equity | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Accounts payable | $ | 17,298 | $ | 15,798 | $ | 14,306 | $ | 16,678 | ||||||||
Payroll and employee related liabilities | 16,885 | 12,027 | 13,313 | 12,651 | ||||||||||||
Commissions payable | 10,532 | 7,589 | 8,370 | 9,222 | ||||||||||||
Deferred revenue and customer deposits | 3,887 | 4,098 | 7,260 | 5,232 | ||||||||||||
Accrued expenses | 5,441 | 6,184 | 5,845 | 4,682 | ||||||||||||
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Total current liabilities | 54,043 | 45,696 | 49,094 | 48,465 | ||||||||||||
Postretirement benefits | 14,341 | 15,737 | 21,224 | 21,853 | ||||||||||||
Other long-term liabilities | 7,688 | 8,087 | 4,929 | 4,832 | ||||||||||||
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Total liabilities | 76,072 | 69,520 | 75,247 | 75,150 | ||||||||||||
Equity: | ||||||||||||||||
Common shares, without par value: | ||||||||||||||||
Authorized – 35,000,000 shares; | ||||||||||||||||
Outstanding – 26,117,045 shares at September 30, 2018 and 26,106,623 shares at December 31, 2017 (after deducting treasury shares of 931,751 and 942,173, respectively), at stated capital amounts | 5,102 | 5,100 | ||||||||||||||
Outstanding – 26,124,393 shares at June 30, 2019 and 26,117,045 shares at December 31, 2018 (after deducting treasury shares of 924,403 and 931,751, respectively), at stated capital amounts | 5,104 | 5,102 | ||||||||||||||
Additionalpaid-in capital | 840 | 526 | 2,943 | 2,539 | ||||||||||||
Retained earnings | 353,116 | 332,378 | 319,600 | 308,914 | ||||||||||||
Accumulated other comprehensive loss | (11,319 | ) | (12,509 | ) | (22,298 | ) | (23,423 | ) | ||||||||
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Total equity | 347,739 | 325,495 | 305,349 | 293,132 | ||||||||||||
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Total liabilities and equity | $ | 423,811 | $ | 395,015 | $ | 380,596 | $ | 368,282 | ||||||||
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See notes to consolidated financial statements (unaudited).
4
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended September 30, | Six Months Ended June 30, | |||||||||||||||
(Thousands of dollars) | 2018 | 2017 | ||||||||||||||
(Dollars in thousands) | 2019 | 2018 | ||||||||||||||
Cash flows from operating activities: | ||||||||||||||||
Net income | $ | 30,491 | $ | 18,615 | $ | 17,702 | $ | 19,790 | ||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||
Depreciation and amortization | 10,884 | 11,406 | 7,095 | 7,210 | ||||||||||||
Pension expense | 4,301 | 5,696 | 1,411 | 3,660 | ||||||||||||
Contributions to pension plan | (4,000 | ) | (2,000 | ) | — | (4,000 | ) | |||||||||
Impairment of goodwill and other intangible assets | — | 4,098 | ||||||||||||||
Stock based compensation | 474 | 606 | ||||||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
Accounts receivable, net | (5,962 | ) | 4,570 | (7,707 | ) | (7,254 | ) | |||||||||
Inventories, net | (7,811 | ) | (3,377 | ) | 8,765 | (5,214 | ) | |||||||||
Accounts payable | 1,857 | (278 | ) | (2,396 | ) | 966 | ||||||||||
Commissions payable | 3,062 | (4,593 | ) | (836 | ) | 1,025 | ||||||||||
Deferred revenue and customer deposits | 2,028 | (765 | ) | |||||||||||||
Income taxes | (2,738 | ) | 909 | 1,577 | (3,839 | ) | ||||||||||
Accrued expenses and other | 481 | (4,975 | ) | (900 | ) | (2,727 | ) | |||||||||
Benefit obligations | 5,980 | 3,341 | (725 | ) | 4,879 | |||||||||||
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Net cash provided by operating activities | 36,545 | 33,412 | 26,488 | 14,337 | ||||||||||||
Cash used for investing activities: | ||||||||||||||||
Capital additions | (7,647 | ) | (4,840 | ) | (3,464 | ) | (5,479 | ) | ||||||||
Proceeds from sale of property, plant and equipment | 791 | 294 | ||||||||||||||
Proceeds (purchases) of short-term investments, net | 2,968 | (2,975 | ) | (2 | ) | 2,969 | ||||||||||
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Net cash used for investing activities | (3,888 | ) | (7,521 | ) | (3,466 | ) | (2,510 | ) | ||||||||
Cash used for financing activities: | ||||||||||||||||
Cash dividends | (9,791 | ) | (9,004 | ) | (7,053 | ) | (6,527 | ) | ||||||||
Other | (459 | ) | — | (452 | ) | (459 | ) | |||||||||
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Net cash used for financing activities | (10,250 | ) | (9,004 | ) | (7,505 | ) | (6,986 | ) | ||||||||
Effect of exchange rate changes on cash | (706 | ) | 1,467 | 190 | (800 | ) | ||||||||||
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Net increase in cash and cash equivalents | 21,701 | 18,354 | 15,707 | 4,041 | ||||||||||||
Cash and cash equivalents: | ||||||||||||||||
Beginning of period | 79,680 | 57,604 | 46,458 | 79,680 | ||||||||||||
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End of period | $ | 101,381 | $ | 75,958 | $ | 62,165 | $ | 83,721 | ||||||||
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See notes to consolidated financial statements (unaudited).
5
CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)
(Dollars in thousands, except share and per share amounts) | Common Shares | Additional Paid-In | Retained | Accumulated Other Comprehensive | ||||||||||||||||||||
Shares | Dollars | Capital | Earnings | (Loss) Income | Total | |||||||||||||||||||
Balances December 31, 2018 | 26,117,045 | $ | 5,102 | $ | 2,539 | $ | 308,914 | $ | (23,423 | ) | $ | 293,132 | ||||||||||||
Net income | 7,222 | 7,222 | ||||||||||||||||||||||
Other comprehensive income | 164 | 164 | ||||||||||||||||||||||
Stock based compensation | 6,647 | 1 | (81 | ) | 35 | (45 | ) | |||||||||||||||||
Cash dividends - $0.135 per share | (3,526 | ) | (3,526 | ) | ||||||||||||||||||||
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Balances March 31, 2019 | 26,123,692 | $ | 5,103 | $ | 2,458 | $ | 312,645 | $ | (23,259 | ) | $ | 296,947 | ||||||||||||
Net income | 10,480 | 10,480 | ||||||||||||||||||||||
Other comprehensive income | 961 | 961 | ||||||||||||||||||||||
Stock based compensation | 701 | 1 | 485 | 2 | 488 | |||||||||||||||||||
Cash dividends - $0.135 per share | (3,527 | ) | (3,527 | ) | ||||||||||||||||||||
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Balances June 30, 2019 | 26,124,393 | $ | 5,104 | $ | 2,943 | $ | 319,600 | $ | (22,298 | ) | $ | 305,349 | ||||||||||||
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(Dollars in thousands, except share and per share amounts) | Common Shares | Additional Paid-In | Retained | Accumulated Other Comprehensive | ||||||||||||||||||||
Shares | Dollars | Capital | Earnings | (Loss) Income | Total | |||||||||||||||||||
Balances December 31, 2017 | 26,106,623 | $ | 5,100 | $ | 526 | $ | 332,378 | $ | (12,509 | ) | $ | 325,495 | ||||||||||||
Net income | 9,617 | 9,617 | ||||||||||||||||||||||
Other comprehensive income | 699 | 699 | ||||||||||||||||||||||
Cash dividends - $0.125 per share | (3,263 | ) | (3,263 | ) | ||||||||||||||||||||
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Balances March 31, 2018 | 26,106,623 | $ | 5,100 | $ | 526 | $ | 338,732 | $ | (11,810 | ) | $ | 332,548 | ||||||||||||
Net income | 10,173 | 10,173 | ||||||||||||||||||||||
Other comprehensive income | 66 | 66 | ||||||||||||||||||||||
Stock based compensation | 1,422 | 38 | 6 | 44 | ||||||||||||||||||||
Cash dividends - $0.125 per share | (3,264 | ) | (3,264 | ) | ||||||||||||||||||||
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Balances June 30, 2018 | 26,108,045 | $ | 5,100 | $ | 564 | $ | 345,647 | $ | (11,744 | ) | $ | 339,567 | ||||||||||||
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See notes to consolidated financial statements (unaudited).
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Amounts in tables in thousands of dollars, except for per share amounts)
NOTE 1 - BASIS OF PRESENTATION OF FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statementsConsolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and in accordance with the instructions to Form10-Q and do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The consolidated financial statementsConsolidated Financial Statements include the accounts of The Gorman-Rupp Company (the “Company” or “Gorman-Rupp”) and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. In the opinion of management of the Company, all adjustments considered necessary for a fair presentation have been included. Operating results for the three and ninesix months ended SeptemberJune 30, 20182019 are not necessarily indicative of results that may be expected for the year ending December 31, 2018.2019. For further information, refer to the consolidated financial statementsConsolidated Financial Statements and accompanying notes thereto included in the Company’s Annual Report on Form10-K for the year ended December 31, 2017,2018, from which related information herein has been derived.
Certain prior year amounts have been reclassified to conform to the three and nine months ended September 30, 2018 presentation and reflect the adoption of certain accounting standard updates. These reclassifications had no impact on the Company’s previously reported net income, consolidated balance sheets, or consolidated statements of cash flows.
NOTE 2 - RECENTLY ISSUED ACCOUNTING STANDARDS
The Company considers the applicability and impact of all Accounting Standard Updates (“ASUs”). ASUs not listed below were assessed and determined either to be not applicable or are expected to have minimal impact on the Company’s consolidated financial statements.Consolidated Financial Statements.
Recently Adopted Accounting Standards
In March 2017, the FASB issued ASUNo. 2017-07, “Compensation—Retirement Benefits (Topic 715) – Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,” which provides additional guidance on the presentation of net periodic pension and postretirement benefit costs in the income statement and on the components eligible for capitalization. The amendments in this ASU require that an employer report the service cost component of the net periodic benefit costs in the same income statement line item as other compensation costs arising from services rendered by employees during the period. Thenon-service-cost components of net periodic benefit costs are to be presented in the income statement separately from the service cost components and outside a subtotal of income from operations. The ASU also allows for the capitalization of the service cost components, when applicable (i.e., as a cost of internally-manufactured inventory or a self-constructed asset). The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The Company adopted ASU2017-07 on January 1, 2018 on a retrospective basis. As permitted by this ASU, previously disclosed components of postretirement net periodic benefit costs were used as an estimation basis for applying the retrospective presentation as a practical expedient. See Note 7 for further details.
In May 2014, the FASB issued ASU2014-09, “Revenue from Contracts with Customers (Topic 606),” which supersedes most current revenue recognition guidance, including industry-specific guidance, and requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. Subsequent accounting standards updates have been issued, which amend and/or clarify the application of ASU2014-09. On January 1, 2018, the Company adopted Topic 606 using the modified retrospective method. See Note 3 for further details.
Recently Issued Accounting Standards Not Yet Adopted
In February 2018, the FASB issued ASUNo. 2018-02, “Income Statement—Reporting Comprehensive Income (Topic 220)—Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,” which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the U.S. Tax Cuts and Jobs Act (“Tax Act”) signed into law in December 2017. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018 and early adoption is permitted. The Company currently does not expect the adoption of ASU2018-02 will have a material impact on its consolidated financial statements.
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In February 2016, the FASB issued ASU2016-02, “Leases (Topic 842),” which requires lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by all leases with a term of more than one year. Accounting by lessors will remainremains similar to existingpre-existing U.S. GAAP. Subsequent accounting standards updates have been issued, which amend and/or clarify the application of ASU2016-02. The guidance isCompany adopted Topic 842 effective January 1, 2019. See Note 9, Leases for fiscal years, and interim periods within those years, beginning after December 15, 2018 and early adoption is permitted. Management has completed their initial review of the Company’s lease obligations and has begun to consider the impacts of those adjustments based on the new standard. The Company currently does not expect the adoption of ASU2016-02 will have a material impact on its consolidated financial statements as its future minimum lease commitments are not material.further details.
NOTE 3 - REVENUE
Adoption of ASU2014-09, Revenue from Contracts with Customers (Topic 606)
On January 1, 2018, the Company adopted ASU2014-09 using the modified retrospective method applied to those contracts which were not completed as of December 31, 2017. Results for reporting periods beginning after January 1, 2018 are presented under Accounting Standards Codification (“ASC”) Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with historic accounting guidance under ASC Topic 605. After assessment of the cumulative impact of adopting ASU2014-09, it was determined that the cumulative effect adjustment required under the new guidance was immaterial and therefore the Company did not record a retrospective adjustment to the opening balance of retained earnings at January 1, 2018.
Disaggregation of Revenue
The following tables disaggregate total net sales by major product category and geographic location:
Product Category | Product Category | |||||||||||||||||||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||||
Pumps and pump systems | $ | 89,835 | $ | 79,946 | $ | 268,485 | $ | 241,357 | $ | 92,167 | $ | 97,784 | $ | 174,688 | $ | 178,611 | ||||||||||||||||
Repair parts for pumps and pump systems and other | 13,058 | 14,030 | 42,839 | 43,094 | 16,163 | 14,043 | 30,501 | 29,820 | ||||||||||||||||||||||||
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Total net sales | $ | 102,893 | $ | 93,976 | $ | 311,324 | $ | 284,451 | $ | 108,330 | $ | 111,827 | $ | 205,189 | $ | 208,431 | ||||||||||||||||
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Geographic Location | ||||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
United States | $ | 65,285 | $ | 58,819 | $ | 201,237 | $ | 181,447 | ||||||||
Foreign countries | 37,608 | 35,157 | 110,087 | 103,004 | ||||||||||||
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Total net sales | $ | 102,893 | $ | 93,976 | $ | 311,324 | $ | 284,451 | ||||||||
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Geographic Location | ||||||||||||||||
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
United States | $ | 74,784 | $ | 71,519 | $ | 142,485 | $ | 135,952 | ||||||||
Foreign countries | 33,546 | 40,308 | 62,704 | 72,479 | ||||||||||||
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Total net sales | $ | 108,330 | $ | 111,827 | $ | 205,189 | $ | 208,431 | ||||||||
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International sales represented approximately 37%31% and 36% of total net sales for both the thirdsecond quarter of 2019 and 2018, and 2017respectively, and were made to customers in many different countries around the world.
Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to a customer, and is the unit of account in ASC Topic 606. The transaction price for a customer contract is allocated to each distinct performance obligation and recognized as revenue when, or as, the Company’s performance obligation is satisfied. For product sales, other than long-term construction-type contracts, the Company recognizes revenue once control has passed at a point in time, which is generally when products are shipped. Payments received for product sales typically occur following delivery and the satisfaction of the performance obligation based upon the terms outlined in the contracts. Substantially all of our customer contracts are fixed-price contracts and the majority of our customer contracts have a single performance obligation, as the promise to transfer the individual goodsproducts or services is not separately identifiable from other promises in the contract. For customer contracts with multiple performance obligations, the Company allocates revenue to each performance obligation based on its relative standalone selling price, which is generally determined based on standalone selling prices charged to customers or using expected cost plus margin.
7
All of the Company’s performance obligations, and associated revenue, are generally transferred to customers at a point in time, with the exception of certain highly customized pump products, which are transferred to the customer over time. Revenue from
The Company offers standard warranties for its products to ensure that its products comply with agreed-upon specifications in its contracts. For standard warranties, these do not give rise to performance obligations transferredand represent assurance-type warranties.
Shipping and handling activities related to products sold to customers, whether performed before or after the customer over timeobtains control of the products, are generally accounted for as activities to fulfill the promise to transfer the products and recognized in the third quarter and first nine months of 2018 was $0.4 million and $1.0 million, respectively, greater than what would have been recorded prior to the adoption of ASU2014-09.not as a separate performance obligation.
On SeptemberJune 30, 2018,2019, the Company had $122.4$107.0 million of remaining performance obligations, also referred to as backlog. The Company expects to recognize as revenue substantially all of its remaining performance obligations within one year.
Contract Estimates
Accounting for long-term contracts involves the use of various techniques to estimate total contract revenue and costs. For long-term contracts, the Company estimates the profit on a contract as the difference between the total estimated revenue and expected costs to complete a contract and recognizes that profit as performance obligations are satisfied. Contract estimates are based on various assumptions to project the outcome of future events that could span longer than one year. These assumptions include labor productivity and availability, the complexity of the work to be performed, the cost and availability of materials, and the performance of subcontractors as applicable.
As a significant change in one or more of these estimates could affect the profitability of our contracts, the Company reviews and updates its contract-related estimates regularly. Adjustments in estimated profit on contracts are accounted for under the cumulativecatch-up method. Under this method, the impact of the adjustment on profit recorded to date on a contract is recognized in the period the adjustment is identified. Revenue and profit in future periods of contract performance are recognized using the adjusted estimate.
8
Contract Balances
The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (contract assets), and customer advances and deposits (contract liabilities) onin the consolidated balance sheets.Consolidated Balance Sheets. For certain highly customized pump products, revenue is recognized over time before the customer is invoiced, resulting in contract assets. Sometimes the Company receives advances or deposits from its customers before revenue is recognized, resulting in contract liabilities. These contract assets and liabilities are reported onin the consolidated balance sheetsConsolidated Balance Sheets as a component of Other Assetsassets and Deferred Revenuerevenue and customer deposits, respectively, on acontract-by-contract basis at the end of each reporting period.
The beginning and ending balances of the Company’s contract assets and liabilities as of SeptemberJune 30, 2019 and December 31, 2018, arerespectively, were as follows:
Beginning balances at December 31, 2017 | Ending balances at September 30, 2018 | June 30, 2019 | December 31, 2018 | |||||||||||||
Contract assets | $ | — | $ | 962 | $ | 801 | $ | 1,953 | ||||||||
Contract liabilities | $ | 4,098 | $ | 3,887 | $ | 7,260 | $ | 5,232 |
Revenue recognized for the ninesix months ended SeptemberJune 30, 2019 and 2018 that was included in the contract liabilityliabilities balance at December 31, 2017the beginning of the period was $3.4 million.$4.9 million and $3.3 million, respectively.
NOTE 4 - INVENTORIES
InventoriesLIFO inventories are stated at the lower of cost or market and all other inventories are stated at the lower of cost or net realizable value. The costs for approximately 71% of inventories at September 30, 2018 and 72% at December 31, 2017 were determined using thelast-in,first-out (“LIFO”) method, with the remainder determined using thefirst-in,first-out (FIFO) method applied on a consistent basis. Replacement cost approximatedapproximates current cost and the excess over LIFO cost wasis approximately $62.9$65.2 million and $59.7$63.7 million at SeptemberJune 30, 20182019 and December 31, 2017,2018, respectively. Allowances for excess and obsolete inventory totaled $5.4 million and $5.3 million at June 30, 2019 and December 31, 2018, respectively. An actual valuation of inventory under the LIFO method is made at the end of each year based on the inventory levels and costs at that time. Interim LIFO calculations are based on management’s estimate of expectedyear-end inventory levels and costs, and are subject to the finalyear-end LIFO inventory valuation.
Allowances for excess and obsolete inventory totaled $5.2 million and $4.9 million at September 30, 2018 and December 31, 2017, respectively.
The major componentsInventories are comprised of net inventories are as follows:the following:
September 30, 2018 | December 31, 2017 | |||||||
Raw materials andin-process | $ | 22,039 | $ | 17,528 | ||||
Finished parts | 50,525 | 48,247 | ||||||
Finished products | 9,480 | 9,192 | ||||||
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Total net inventories | $ | 82,044 | $ | 74,967 | ||||
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8
Inventories, net: | June 30, 2019 | December 31, 2018 | ||||||
Raw materials andin-process | $ | 17,985 | $ | 21,773 | ||||
Finished parts | 50,584 | 54,209 | ||||||
Finished products | 10,240 | 11,405 | ||||||
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Total net inventories | $ | 78,809 | $ | 87,387 | ||||
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NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, net consist of the following:
September 30, 2018 | December 31, 2017 | June 30, 2019 | December 31, 2018 | |||||||||||||
Land | $ | 3,879 | $ | 4,187 | $ | 3,876 | $ | 3,869 | ||||||||
Buildings | 106,393 | 106,437 | 107,676 | 106,940 | ||||||||||||
Machinery and equipment | 176,517 | 170,615 | 180,338 | 177,668 | ||||||||||||
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286,789 | 281,239 | 291,890 | 288,477 | |||||||||||||
Less accumulated depreciation | (173,323 | ) | (164,168 | ) | (181,364 | ) | (174,984 | ) | ||||||||
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Property, plant and equipment, net | $ | 113,466 | $ | 117,071 | $ | 110,526 | $ | 113,493 | ||||||||
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9
NOTE 6 - PRODUCT WARRANTIES
A liability is established for estimated future warranty and service claims based on historical claims experience and specific product failures. The Company expenses warranty costs directly to costCost of products sold. Changes in the Company’s product warrantywarranties liability are:
September 30, | June 30, | |||||||||||||||
2018 | 2017 | 2019 | 2018 | |||||||||||||
Balance at beginning of year | $ | 1,098 | $ | 1,435 | $ | 1,380 | $ | 1,098 | ||||||||
Provision | 803 | 1,058 | 948 | 586 | ||||||||||||
Claims | (904 | ) | (1,360 | ) | (822 | ) | (686 | ) | ||||||||
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Balance at end of period | $ | 997 | $ | 1,133 | $ | 1,506 | $ | 998 | ||||||||
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NOTE 7 - PENSION AND OTHER POSTRETIREMENT BENEFITS
The Company sponsors a defined benefit pension plan (the “Plan”(“Plan”) covering certain domestic employees. Benefits are based on each covered employee’s years of service and compensation. The Plan is funded in conformity with the funding requirements of applicable U.S. regulations. The Plan was closed to new participants effective January 1, 2008. Employees hired after this date, in eligible locations, participate in an enhanced 401(k) plan instead of the Plan.defined benefit pension plan. Employees hired prior to this date continue to accrue benefits under the Plan. The Company has contributed $4.0 million to the Plan in the first nine months of 2018 and does not expect to make any further contributions during the remainder of the year.benefits.
Additionally, the Company sponsors defined contribution pension plans made available to all domestic and Canadian employees. The Company funds the cost of these benefits as incurred.
The Company also sponsors anon-contributory defined benefit postretirement health care plan that provides health benefits to certain domestic and Canadian retirees and their spouses.eligible spouses and dependent children. The Company funds the cost of these benefits as incurred.
9
The following tables present the components of net periodic benefit costs:
Pension Benefits | Postretirement Benefits | |||||||||||||||
Three Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Service cost | $ | 562 | $ | 655 | $ | 194 | $ | 312 | ||||||||
Interest cost | 644 | 599 | 141 | 203 | ||||||||||||
Expected return on plan assets | (1,073 | ) | (1,138 | ) | — | — | ||||||||||
Amortization of prior service cost | — | — | (283 | ) | — | |||||||||||
Recognized actuarial loss (gain) | 388 | 436 | (103 | ) | (168 | ) | ||||||||||
Settlement loss | 120 | 448 | — | — | ||||||||||||
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Net periodic benefit cost | $ | 641 | $ | 1,000 | $ | (51 | ) | $ | 347 | |||||||
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Pension Benefits | Postretirement Benefits | |||||||||||||||
Nine Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Service cost | $ | 1,857 | $ | 2,078 | $ | 582 | $ | 937 | ||||||||
Interest cost | 1,882 | 1,918 | 422 | 610 | ||||||||||||
Expected return on plan assets | (3,380 | ) | (3,525 | ) | — | — | ||||||||||
Amortization of prior service cost | — | — | (847 | ) | — | |||||||||||
Recognized actuarial loss (gain) | 1,206 | 1,384 | (310 | ) | (505 | ) | ||||||||||
Settlement loss | 2,736 | 3,841 | — | — | ||||||||||||
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Net periodic benefit cost | $ | 4,301 | $ | 5,696 | $ | (153 | ) | $ | 1,042 | |||||||
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During the three and nine months ended September 30, 2018, the Company recorded settlement losses relating to retirees that receivedlump-sum distributions from the Company’s defined benefit pension plan totaling $0.1 million and $2.7 million, respectively. These charges were the result oflump-sum payments to retirees which exceeded the Plan’s actuarial service and interest cost thresholds.
The Company adopted ASU2017-07 on January 1, 2018 on a retrospective basis as discussed in Note 2. Pursuant to the amendments in this ASU, the service cost component is now included in cost of products sold and selling, general and administrative expenses. Thenon-service cost components of net periodic benefit costs are now included in other income (expense), net in the consolidated statements of income. The Company utilized the practical expedient approach, based on amounts previously disclosed, to reclassifynon-service components of net periodic benefit cost from cost of products sold and selling, general and administrative expenses, into other income (expense), net on the consolidated statements of income.
The following table summarizes the amounts reclassified into other income (expense), net for the three and nine months ended September 30, 2017:
Three | Nine | |||||||
Months ended September 30, | ||||||||
2017 | 2017 | |||||||
Cost of products sold | $ | (259 | ) | $ | (2,416 | ) | ||
Selling, general and administrative expenses | (120 | ) | (1,307 | ) | ||||
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Total amount reclassified | $ | (379 | ) | $ | (3,723 | ) | ||
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Pension Benefits | Postretirement Benefits | |||||||||||||||
Three Months Ended June 30, | Three Months Ended June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Service cost | $ | 535 | $ | 602 | $ | 270 | $ | 194 | ||||||||
Interest cost | 581 | 632 | 236 | 141 | ||||||||||||
Expected return on plan assets | (836 | ) | (1,103 | ) | — | — | ||||||||||
Amortization of prior service cost | — | — | (282 | ) | (282 | ) | ||||||||||
Recognized actuarial loss (gain) | 472 | 421 | 7 | (104 | ) | |||||||||||
Settlement loss | — | 2,229 | — | — | ||||||||||||
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Net periodic benefit cost (a) | $ | 752 | $ | 2,781 | $ | 231 | $ | (51 | ) | |||||||
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Pension Benefits | Postretirement Benefits | |||||||||||||||
Six Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Service cost | $ | 1,102 | $ | 1,295 | $ | 541 | $ | 388 | ||||||||
Interest cost | 1,227 | 1,238 | 471 | 282 | ||||||||||||
Expected return on plan assets | (1,781 | ) | (2,307 | ) | — | — | ||||||||||
Amortization of prior service cost | — | — | (564 | ) | (565 | ) | ||||||||||
Recognized actuarial loss (gain) | 863 | 818 | 14 | (207 | ) | |||||||||||
Settlement loss | — | 2,616 | — | — | ||||||||||||
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Net periodic benefit cost (a) | $ | 1,411 | $ | 3,660 | $ | 462 | $ | (102 | ) | |||||||
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(a) | The components of net periodic benefit cost other than the service cost component are included in Other income (expense), net in the Consolidated Statements of Income. |
NOTE 8 - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table summarizes reclassifications out of accumulatedAccumulated other comprehensive income (loss): as reported in the Consolidated Statements of Income are:
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||||
Pension and other postretirement benefits: | ||||||||||||||||||||||||||||||||
Recognized actuarial loss (a) | $ | 285 | $ | 267 | $ | 896 | $ | 879 | $ | 479 | $ | 317 | $ | 877 | $ | 611 | ||||||||||||||||
Settlement loss (b) | 120 | 448 | 2,736 | 3,841 | — | 2,229 | — | 2,616 | ||||||||||||||||||||||||
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Total before income tax | $ | 405 | $ | 715 | $ | 3,632 | $ | 4,720 | $ | 479 | $ | 2,546 | $ | 877 | $ | 3,227 | ||||||||||||||||
Income tax | (97 | ) | (243 | ) | (893 | ) | (1,692 | ) | (101 | ) | (625 | ) | (183 | ) | (796 | ) | ||||||||||||||||
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Net of income tax | $ | 308 | $ | 472 | $ | 2,739 | $ | 3,028 | $ | 378 | $ | 1,921 | $ | 694 | $ | 2,431 | ||||||||||||||||
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(a) | The recognized actuarial loss is included in Other income (expense), net in the |
(b) | The settlement loss is included in |
The following tables summarize changes in balances for each componentcomponents of accumulatedAccumulated other comprehensive income (loss): as reported in the Consolidated Balance Sheets are:
Currency Translation Adjustments | Pension and Other Postretirement Benefits | Accumulated Other Comprehensive Income (Loss) | ||||||||||
Balance at December 31, 2017 | $ | (5,321 | ) | $ | (7,188 | ) | $ | (12,509 | ) | |||
Reclassification adjustments | — | 3,632 | 3,632 | |||||||||
Current period charge | (1,549 | ) | — | (1,549 | ) | |||||||
Income tax expense | — | (893 | ) | (893 | ) | |||||||
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Balance at September 30, 2018 | $ | (6,870 | ) | $ | (4,449 | ) | $ | (11,319 | ) | |||
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Currency Translation Adjustments | Pension and Other Postretirement Benefits | Accumulated Other Comprehensive Income (Loss) | ||||||||||
Balance at December 31, 2016 | $ | (8,842 | ) | $ | (11,623 | ) | $ | (20,465 | ) | |||
Reclassification adjustments | — | 4,720 | 4,720 | |||||||||
Current period benefit | 3,119 | 54 | 3,173 | |||||||||
Income tax expense | — | (1,746 | ) | (1,746 | ) | |||||||
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Balance at September 30, 2017 | $ | (5,723 | ) | $ | (8,595 | ) | $ | (14,318 | ) | |||
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NOTE 9 - INCOME TAXES
The Tax Act enacted in December 2017 reduced the federal corporate tax rate on U.S. earnings to 21% and moved from a global taxation regime to a modified territorial regime. The Company’s lower effective income tax rate of 21.6% for the third quarter and first nine months of 2018 compared to 28.3% and 31.3% for the third quarter and first nine months of 2017, respectively, were due primarily to the Tax Act.
During the third quarter and first nine months of 2018, the Company recorded adjustments of $0.2 million and $48,000, respectively, of income tax benefit to the provisional amounts the Company recorded in the fourth quarter of 2017 regarding transitional impacts of the Tax Act. The provisional amounts are based on the Company’s current analysis of the Tax Act. Given the significant complexity of the Tax Act and the potential for additional guidance from the U.S. Treasury, Securities and Exchange Commission or the Financial Accountings Standards Board related to the Tax Act, these estimates may be adjusted during the remainder of 2018. Adjustments to the provisional amounts recorded in the fourth quarter of 2017 will affect the Company’s tax expense in the period that the final adjustments are determined, which will be no later than the fourth quarter of 2018.
Currency Translation Adjustments | Pension and Other Postretirement Benefits | Accumulated Other Comprehensive Income (Loss) | ||||||||||
Balance at December 31, 2018 | $ | (8,243 | ) | $ | (15,180 | ) | $ | (23,423 | ) | |||
Reclassification adjustments | — | 877 | 877 | |||||||||
Current period benefit | 431 | — | 431 | |||||||||
Income tax benefit (charge) | — | (183 | ) | (183 | ) | |||||||
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Balance at June 30, 2019 | $ | (7,812 | ) | $ | (14,486 | ) | $ | (22,298 | ) | |||
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11
Currency Translation Adjustments | Pension and Other Postretirement Benefits | Accumulated Other Comprehensive Income (Loss) | ||||||||||
Balance at December 31, 2017 | $ | (5,321 | ) | $ | (7,188 | ) | $ | (12,509 | ) | |||
Reclassification adjustments | — | 3,227 | 3,227 | |||||||||
Current period benefit | (1,666 | ) | — | (1,666 | ) | |||||||
Income tax charge | — | (796 | ) | (796 | ) | |||||||
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Balance at June 30, 2018 | $ | (6,987 | ) | $ | (4,757 | ) | $ | (11,744 | ) | |||
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NOTE 9 - LEASES
On January 1, 2019, the Company adopted ASU2016-02 using the modified retrospective method as of the effective date of January 1, 2019 (the effective date method). Under the effective date method, financial results reported in periods prior to 2019 are unchanged. In transition to the new lease guidance, the Company elected the package of practical expedients permitted under the transition guidance within the new standard that allowed the Company to not reassess whether a contract is or contains a lease, lease classification and initial direct costs; however, the Company did not elect the hindsight transitional practical expedient. The Company has also elected the practical expedient to not account for lease components (e.g., fixed payments including rent, real estate taxes and insurance costs) separately from the nonlease components. After assessment of the cumulative impact of adopting ASU2016-02, it was determined that the cumulative effect adjustment required under the new guidance was immaterial and therefore the Company did not record a retrospective adjustment to the opening balance of retained earnings at January 1, 2019. The Company recognized additional operating leaseright-of-use assets and lease liabilities of $1.6 million as of January 1, 2019.
The Company is evaluatingcurrently a lessee under a number of operating leases and two finance leases for certain aspectsoffices, manufacturing facilities, land, office equipment and automobiles, none of which are material to its operations. The Company’s leases generally have remaining lease terms of 1 year to 5 years, some of which include options to extend the Tax Act, includingleases for up to 5 years, and some of which include options to terminate the deferred tax effects ofleases within 1 year. These leases do not have significant rent escalation holidays, concessions, leasehold improvement incentives, or otherbuild-out clauses. Further, the global intangiblelow-taxed income (“GILTI”) provision of the Tax Act. Under U.S. GAAP, the Company is allowed to make an accounting policy election to either recognize deferred taxes for temporary differences expected to reverse as GILTI in future years or provide for the tax expenseleases do not contain contingent rent provisions.
Supplemental information related to GILTI resulting from those items inleases and the year the taxCompany’s Consolidated Financial Statements is incurred. As of September 30, 2018, the Company included GILTI related to current-year operations in its estimated annual effective tax rate, but has not yet made a policy decision regarding whether to record deferred taxes on GILTI. The policy decision will be made no later than the fourth quarter of 2018, and any impact of the decision will be recorded in the period the decision is made.
NOTE 10 - SUBSEQUENT EVENTS
On October 25, 2018, the Board of Directors authorized the payment of a special dividend of $2.00 per share on the common stock of the Company, totaling approximately $52 million, payable December 10, 2018, to shareholders of record as of November 15, 2018.follows:
Three Months Ended June 30, 2019 | Six Months Ended June 30, 2019 | |||||||
Components of lease costs: | ||||||||
Operating lease costs | $ | 140 | $ | 267 | ||||
Short-term lease costs | 65 | 176 | ||||||
Finance lease costs | 31 | 36 | ||||||
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Total lease costs | $ | 236 | $ | 479 | ||||
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As of June 30, 2019 | ||||
Weighted average remaining lease term (years): | ||||
Operating leases | 3.0 | |||
Finance lease | 4.8 | |||
Weighted average discount rate: | ||||
Operating leases | 3.25 | % | ||
Finance lease | 3.25 | % |
12
As of June 30, 2019 | ||||||||||||
Operating Leases | Financing Leases | Total Leases | ||||||||||
Other assets -right-of-use assets | $ | 1,317 | $ | 606 | $ | 1,923 | ||||||
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Lease liabilities included in: | ||||||||||||
Accrued expenses - current portion of lease liabilities | $ | 609 | $ | 120 | $ | 729 | ||||||
Other long-term liabilities -non-current portion of lease liabilities | 707 | 488 | 1,195 | |||||||||
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Total lease liabilities | $ | 1,316 | $ | 608 | $ | 1,924 | ||||||
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Maturities of lease liabilities are as follows:
As of June 30, 2019 | As of December 31, 2018 | |||||||
2019 | $ | 442 | $ | 702 | ||||
2020 | 592 | 411 | ||||||
2021 | 428 | 260 | ||||||
2022 | 292 | 124 | ||||||
2023 | 220 | 75 | ||||||
Thereafter | 45 | 10 | ||||||
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Total lease payments | $ | 2,019 | $ | 1,582 | ||||
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Less: Interest | (95 | ) | ||||||
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Present value of lease liabilities | $ | 1,924 | ||||||
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ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
(Amounts in tables in thousands of dollars, except for per share amounts)
The following discussion and analysis of the Company’s financial condition and resultsResults of operationsOperations should be read in conjunction with the consolidated financial statements,Consolidated Financial Statements, and notes thereto, and the other financial data included elsewhere in this Quarterly Report on Form10-Q. The following discussion should also be read in conjunction with the Company’s audited consolidated financial statements,Consolidated Financial Statements and accompanying notes, thereto, and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in its Annual Report on Form10-K for the year ended December 31, 2017.2018.
Executive Overview
The following discussion of Results of Operations includes certainnon-GAAP financial data and measures such as adjusted earnings before interest, taxes, depreciation and amortization and adjusted earnings per share amounts which excludenon-cash pension settlement charges in 2018 and 2017 andnon-cash impairment charges relating to goodwill and other intangible assets in 2017.2018. Management utilizes these adjusted financial data and measures to assess comparative operations against those of prior periods without the distortion ofnon-comparable factors. The Gorman-Rupp Company believes that thesenon-GAAP financial data and measures also will be useful to investors in assessing the strength of the Company’s underlying operations from period to period. Provided below is a reconciliation of adjusted earnings per share amounts and adjusted earnings before interest, taxes, depreciation and amortization.
1213
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||||
Adjusted earnings per share: | ||||||||||||||||||||||||||||||||
Reported earnings per share – GAAP basis | $ | 0.41 | $ | 0.22 | $ | 1.17 | $ | 0.71 | $ | 0.40 | $ | 0.39 | $ | 0.68 | $ | 0.76 | ||||||||||||||||
Plus pension settlement charges per share | — | 0.01 | 0.08 | 0.10 | ||||||||||||||||||||||||||||
Plus impairment of goodwill and other intangible asset charges | — | 0.10 | — | 0.10 | ||||||||||||||||||||||||||||
Plus pension settlement charge per share | — | 0.07 | — | 0.08 | ||||||||||||||||||||||||||||
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Non-GAAP adjusted earnings per share | $ | 0.41 | $ | 0.33 | $ | 1.25 | $ | 0.91 | $ | 0.40 | $ | 0.46 | $ | 0.68 | $ | 0.84 | ||||||||||||||||
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Adjusted earnings before interest, taxes, depreciation and amortization: | ||||||||||||||||||||||||||||||||
Reported net income–GAAP basis | $ | 10,701 | $ | 5,702 | $ | 30,491 | $ | 18,615 | $ | 10,480 | $ | 10,173 | $ | 17,702 | $ | 19,790 | ||||||||||||||||
Plus income taxes | 2,951 | 2,255 | 8,403 | 8,469 | 2,955 | 2,413 | 4,975 | 5,452 | ||||||||||||||||||||||||
Plus depreciation and amortization | 3,674 | 3,973 | 10,884 | 11,406 | 3,529 | 3,610 | 7,095 | 7,210 | ||||||||||||||||||||||||
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Non-GAAP earnings before interest, taxes, depreciation and amortization | 17,326 | 11,930 | 49,778 | 38,490 | 16,964 | 16,196 | 29,772 | 32,452 | ||||||||||||||||||||||||
Plus pension settlement charges | 120 | 448 | 2,736 | 3,841 | ||||||||||||||||||||||||||||
Plus impairment of goodwill and other intangible asset charges | — | 4,098 | — | 4,098 | ||||||||||||||||||||||||||||
Plus pension settlement charge | — | 2,229 | — | 2,616 | ||||||||||||||||||||||||||||
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Non-GAAP adjusted earnings before interest, taxes, depreciation and amortization | $ | 17,446 | $ | 16,476 | $ | 52,514 | $ | 46,429 | $ | 16,964 | $ | 18,425 | $ | 29,772 | $ | 35,068 | ||||||||||||||||
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The Gorman-Rupp Company (“we”, “our”, “Gorman-Rupp” or the “Company”) is a leading designer, manufacturer and international marketer of pumps and pump systems for use in diverse water, wastewater, construction, dewatering, industrial, petroleum, original equipment, agriculture, fire protection, heating, ventilating and air conditioning (HVAC), military and other liquid-handling applications. The Company attributes its success to long-term product quality, applications and performance combined with timely delivery and service, and continually seeks to develop initiatives to improve performance in these key areas.
WeGorman-Rupp actively pursuepursues growth opportunities through organic growth, international business expansion and acquisitions.
We regularly invest in training for our employees, in new product development and in modern manufacturing equipment, technology and facilities all designed to increase production efficiency and capacity and drive growth by delivering innovative solutions to our customers. We believe that the diversity of our markets is a major contributor to the generally stable financial growth we have produced over the past 80 plus85 years.
The Company places a strong emphasis on cash flow generation and maintaining excellent liquidity and financial flexibility. This focus has afforded us the ability to reinvest our cash resources provide regular returns for our shareholders in the form of cash dividends and preserve a strong balance sheet to position us for future acquisition and product development opportunities. The Company had no bank debt as of SeptemberJune 30, 2018.2019. The Company’s cash position increased $21.7$15.7 million during the first ninesix months of 20182019 to $101.4$62.2 million at SeptemberJune 30, 20182019 and the Company generated $52.5$17.0 million in adjusted earnings before interest, taxes, depreciation and amortization during the same period.
Capital expenditures for the first ninesix months of 20182019 were $7.6$3.5 million and consisted primarily of machinery and equipment. Capital expenditures for the full-year 20182019 are presently planned to be in the range of$10-15-$1220 million primarily for building expansion and machinery and equipment purchases, and are expected to be financed through internally generatedinternally-generated funds.
Net sales for the thirdsecond quarter of 2019 were $108.3 million compared to record net sales of $111.8 million for the second quarter of 2018, were $102.9 million compared to $94.0 million for the third quartera decrease of 2017, an increase of 9.5%3.1% or $8.9$3.5 million. Domestic sales increased 11.0%4.6% or $6.5$3.3 million andwhile international sales increased 7.0%decreased 16.8% or $2.4$6.8 million compared to the same period in 2017. 2018.
Gross profit was $27.3$28.2 million for the thirdsecond quarter of 2018,2019, resulting in gross margin of 26.6%26.0%, compared to gross profit of $26.5 million and gross margin of 28.2% for the same period in 2017. The 160 basis points decrease in gross margin was largely driven by an unfavorable LIFO impact of 140 basis points. The remaining 20 basis points decrease in gross margin was due to a 140 basis points increase in material costs primarily as a result of inflationary pressures and tariffs, partially offset by lower overhead costs as a percent of sales of 120 basis points primarily due to leverage from increased sales volume.
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Selling, general and administrative expenses (“SG&A”) was $14.2 million and 13.8% of net sales for the third quarter of 2018 compared to $14.1 million and 15.0% of net sales for the same period in 2017. SG&A as a percentage of sales improved 120 basis points primarily as a result of leverage from increased sales volume.
Operating income was $13.1 million, resulting in operating margin of 12.8% for the third quarter of 2018, compared to operating income of $8.2 million and operating margin of 8.8% for the same period in 2017. The third quarter of 2017 includednon-cash impairment charges of $4.1 million or 440 basis points due to decreased demand for barge pumps in the marine transportation market. Excluding the impairment charges, operating margin decreased 40 basis points due principally to an unfavorable LIFO impact.
The Company’s effective tax rate decreased to 21.6% for the third quarter of 2018 from 28.3% for the third quarter of 2017, due primarily to the impact of the U.S. Tax Cuts and Jobs Act (“Tax Act”) enacted in December 2017.
Net income was $10.7 million for the third quarter of 2018 compared to $5.7 million in the third quarter of 2017, and earnings per share were $0.41 and $0.22 for the respective periods. Earnings per share for the third quarter of 2018 included an unfavorable LIFO impact of $0.04 per share. Earnings per share for the third quarter of 2017 includednon-cash impairment charges of $0.10 per share and anon-cash pension settlement charge of $0.01 per share.
Net sales for the first nine months of 2018 were $311.3 million compared to $284.5 million for the first nine months of 2017, an increase of 9.4% or $26.9 million. Domestic sales increased 10.9% or $19.8 million and international sales increased 6.9% or $7.1 million compared to the same period in 2017.
Gross profit was $83.4 million for the first nine months of 2018, resulting in gross margin of 26.8%, compared to gross profit of $76.0$29.9 million and gross margin of 26.7% for the same period in 2017.2018. Material costs as a percentage of sales were flat in the second quarter of 2019 compared to the same period last year as selling price increases implemented at the beginning of 2019 were realized. The 1070 basis points increasedecrease in gross margin was largely driven bydue principally to the loss of leverage from increasedlower sales volume partially offsetcompared to the second quarter of 2018.
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Selling, general and administrative (“SG&A”) expenses were $15.0 million and 13.8% of net sales for the second quarter of 2019 compared to $14.9 million and 13.3% of net sales for the same period in 2018. SG&A expenses as a percentage of sales increased 50 basis points due principally to the loss of leverage from lower sales volume.
Operating income was $13.2 million, resulting in operating margin of 12.2%, for the second quarter of 2019, compared to operating income of $15.0 million and operating margin of 13.4% for the same period in 2018. Operating margin decreased 120 basis points due principally to the loss of leverage from lower sales volume.
The Company’s effective tax rate increased to 22.0% for the second quarter of 2019 from 19.2% for the second quarter of 2018 due primarily to pension plan contributions made in the second quarter of 2018 which were eligible for tax deduction at the prior 35.0% federal corporate tax rate.
Net income was $10.5 million for the second quarter of 2019 compared to $10.2 million in the second quarter of 2018, and earnings per share were $0.40 and $0.39 for the respective periods. Anon-cash pension settlement charge reduced second quarter of 2018 earnings by an increase$0.07 per share.
Net sales for the first six months of 2019 were $205.2 million compared to $208.4 million for the first six months of 2018, a decrease of 1.6% or $3.2 million. Domestic sales increased 4.8% or $6.6 million while international sales decreased 13.5% or $9.8 million compared to the same period in material costs primarily2018.
Gross profit was $51.5 million for the first six months of 2019, resulting in gross margin of 25.1%, compared to gross profit of $56.1 million and gross margin of 26.9% for the same period in 2018. Gross margin decreased 180 basis points largely as a result of inflationary pressuresmaterial cost increases due to inflation, tariffs and tariffs.higher freight costs. Gross margin in the second quarter of 2019 improved from the first quarter of 2019 as selling price increases implemented at the beginning of the year were more fully realized.
SG&A was $43.4expenses were $29.4 million and 14.3% of net sales for the first six months of 2019 compared to $29.2 million and 14.0% of net sales for the first nine months of 2018 compared to $41.8 million and 14.7% of net sales for the same period in 2017.2018. SG&A expenses as a percentage of sales improved 70increased 30 basis points primarily as a result of loss of leverage from increasedlower sales volume.
Operating income was $40.0$22.2 million, resulting in operating margin of 12.8%10.8%, for the first ninesix months of 2018,2019, compared to operating income of $30.1$26.8 million and operating margin of 10.6%12.9% for the same period in 2017. The first nine months of 2017 includednon-cash impairment charges in the third quarter of $4.1 million or 140 basis points. Excluding the impairment charges, operating2018. Operating margin improved 80decreased 210 basis points due principally to leverage from increased sales volume.
The Company’s effective tax rate decreased to 21.6% for the first nine months of 2018 from 31.3% for the first nine months of 2017, due primarily to the impact of the Tax Act enacted in December 2017. Excluding discrete impacts of pension plan contributions and transition tax adjustments, the effective tax rate for the first nine months of 2018 would have been 23.2%.material cost increases, which were partially offset by selling price increases.
Net income was $30.5$17.7 million for the first ninesix months of 20182019 compared to $18.6$19.8 million in the first ninesix months of 2017,2018, and earnings per share were $1.17$0.68 and $0.71$0.76 for the respective periods. The first ninesix months of 2018 earnings were reduced bynon-cash pension settlement charges of $0.08 per share. The first nine months of 2017 earnings were reduced bynon-cash impairment charges of $0.10 per share andnon-cash pension settlement charges of $0.10 per share.
The Company’s backlog of orders was $122.4$107.0 million at SeptemberJune 30, 2019 compared to $128.9 million at June 30, 2018 compared to $111.4 million at September 30, 2017 and $114.0$113.7 million at December 31, 2017.2018. The backlog at SeptemberJune 30, 2019 decreased 17.0% compared to June 30, 2018 increased 9.9% as compared to September 30, 2017 driven by increaseddecreased incoming orders in mostseveral of the markets the Company serves, most notably in the municipal,fire protection, construction, industrial and constructionmunicipal markets.
On OctoberJuly 25, 2018,2019, the Board of Directors authorized the payment of a quarterly dividend of $0.135 per share on the common stock of the Company, payable DecemberSeptember 10, 2018,2019, to shareholders of record as of NovemberAugust 15, 2018. This cash dividend will represent an 8.0% increase over the regular dividend paid in the previous quarter.2019. This will mark the 275th278th consecutive quarterly dividend paid by The Gorman-Rupp Company and the 46th consecutive year of increased dividends paid to its shareholders.Company. The dividend yield at SeptemberJune 30, 20182019 was 1.4%1.6%.
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On October 25, 2018, the Board of Directors authorized the payment of a special dividend of $2.00 per share on the common stock of the Company, totaling approximately $52 million, payable December 10, 2018, to shareholders of record as of November 15, 2018.
The Company currently expects to continue its exceptional history of paying regular quarterly dividends and increased annual dividends. However, any future dividends will be reviewed individually and declared by our Board of Directors at its discretion, dependent on our assessment of the Company’s financial condition and business outlook at the applicable time.
Outlook
We are pleased with the third quarter and nine months of 2018 financial results. Incoming orders have increased 8.4% in the first nine months of 2018 as compared to the first nine months of 2017 across the majority of our markets. AsAlthough material costs have continued to rise primarily as a resultgenerally stabilized since the fourth quarter of inflationary pressures2018, uncertainty remains around trade policy issues and tariffs, we remain focusedpotential new tariffs. Our incoming order rate softened during the second quarter of 2019, which will make top line growth more challenging in the second half of the year. Global economic conditions impacted incoming orders in international markets, while adverse weather in many parts of the U.S. put pressure on profitabilityconstruction projects and have begun to implement price increases to offset higher costs. However, increased emphasis on infrastructure improvements at both the federal and state levels, coupled with the impact of lower taxes, could be additional positive factors over the next several years.agriculture market. Our underlying fundamentals remain strong and we believe that we remain well positioned to drive long-term growth.
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Our strong balance sheet provides us with the flexibility to continue to evaluate acquisition opportunities and new product development that we expect will help add value to our operations over the longer term.
The Tax Act enacted In addition, increased interest in December 2017 reducedflood control infrastructure, coupled with the federal corporate tax rate on U.S. earnings to 21% and moved from a global taxation regime to a modified territorial regime. The Company’simpact of lower effective income tax rates of 21.6% for bothtaxes, could be other positive factors over the third quarter and first nine months of 2018 compared to 28.3% and 31.3% for the third quarter and first nine months of 2017, respectively, were due primarily to the Tax Act. Excluding discrete impacts of pension plan contributions and transition tax adjustments, the effective income tax rates for the first nine months of 2018 would have been 23.2%. The Company’s current estimate of its full year effective income tax rate is between 22% and 24%.next several years.
Three Months Ended SeptemberJune 30, 20182019 vs. Three Months Ended SeptemberJune 30, 20172018
Net Sales
Three Months Ended September 30, | ||||||||||||||||
2018 | 2017 | $ Change | % Change | |||||||||||||
Net Sales | $ | 102,893 | $ | 93,976 | $ | 8,917 | 9.5 | % |
Three Months Ended June 30, | ||||||||||||||||
2019 | 2018 | $ Change | % Change | |||||||||||||
Net Sales | $ | 108,330 | $ | 111,827 | $ | (3,497 | ) | (3.1 | )% |
Net sales for the thirdsecond quarter of 2019 were $108.3 million compared to record net sales of $111.8 million for the second quarter of 2018, were $102.9 million compared to $94.0 million for the third quartera decrease of 2017, an increase of 9.5%3.1% or $8.9$3.5 million. Domestic sales increased 11.0%4.6% or $6.5$3.3 million andwhile international sales increased 7.0%decreased 16.8% or $2.4$6.8 million compared to the same period in 2017.2018.
Sales in our water markets increased 12.4%decreased 4.8% or $7.9$3.8 million in the thirdsecond quarter of 20182019 compared to the thirdsecond quarter of 2017.2018. Sales in the fire protection market increased $3.7decreased $2.7 million driven primarily by softness in international sales.markets. Sales in the municipal market increased $2.2 million due primarily to positive municipal economic sentiment. In addition, sales in the construction market increased $1.1 million, sales of repair parts increased $0.7decreased $0.9 million, and sales in the agriculture market decreased $0.5 million. These decreases were partially offset by increased $0.2sales in the construction market of $0.3 million.
Sales increased 3.4% or $1.0 million in ournon-water markets increased 1.0% or $0.3 million during the thirdsecond quarter of 20182019 compared to the thirdsecond quarter of 2017.2018. Sales in the petroleum and industrial marketsmarket increased a combined $1.4$1.5 million due principally to increased capital spending related todriven primarily bymid-stream oil and gas drilling activity.customers, and sales in the OEM market increased $1.0 million primarily related to power generation equipment and services. These increases were partially offset by decreased sales in the OEMindustrial market of $0.4 million.$2.2 million due primarily to softness in the upstream oil and gas market.
International sales were $37.6$33.5 million in the thirdsecond quarter of 20182019 compared to $35.2$40.3 million in the same period last year and represented 37%31% and 36% of total sales for the Company, in both periods.respectively. International sales increased most notablydecreased $3.3 million in the fire protection petroleum and construction markets and decreasedmarket driven primarily by softness in the industrialoil and OEM markets.gas industry and $1.7 million in the construction market due primarily to strong fleet orders last year that did not recur this year.
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Cost of Products Sold and Gross Profit
Three Months Ended September 30, | Three Months Ended June 30, | |||||||||||||||||||||||||||||||
2018 | 2017 | $ Change | % Change | 2019 | 2018 | $ Change | % Change | |||||||||||||||||||||||||
Cost of products sold | $ | 75,566 | $ | 67,518 | $ | 8,048 | 11.9 | % | $ | 80,138 | $ | 81,962 | $ | (1,824 | ) | (2.2 | )% | |||||||||||||||
% of Net sales | 73.4 | % | 71.8 | % | 74.0 | % | 73.3 | % | ||||||||||||||||||||||||
Gross Margin | 26.6 | % | 28.2 | % | 26.0 | % | 26.7 | % |
Gross profit was $27.3$28.2 million for the thirdsecond quarter of 2018,2019, resulting in gross margin of 26.6%26.0%, compared to gross profit of $26.5 million and gross margin of 28.2% for the same period in 2017. The 160 basis points decrease in gross margin was largely driven by an unfavorable LIFO impact of 140 basis points. The remaining 20 basis points decrease in gross margin was due to a 140 basis points increase in material costs primarily as a result of inflationary pressures and tariffs, partially offset by lower overhead costs as a percent of sales of 120 basis points primarily due to leverage from increased sales volume.
Selling, General and Administrative Expenses (SG&A)
Three Months Ended September 30, | ||||||||||||||||
2018 | 2017 | $ Change | % Change | |||||||||||||
Selling, general and administrative expenses | $ | 14,207 | $ | 14,122 | $ | 85 | 0.6 | % | ||||||||
% of Net sales | 13.8 | % | 15.0 | % |
SG&A was $14.2 million and 13.8% of net sales for the third quarter of 2018 compared to $14.1 million and 15.0% of net sales for the same period in 2017. SG&A as a percentage of sales improved 120 basis points primarily as a result of leverage from increased sales volume.
Operating Income
Three Months Ended September 30, | ||||||||||||||||
2018 | 2017 | $ Change | % Change | |||||||||||||
Operating income | $ | 13,120 | $ | 8,238 | $ | 4,882 | 59.3 | % | ||||||||
% of Net sales | 12.8 | % | 8.8 | % |
Operating income was $13.1 million, resulting in operating margin of 12.8% for the third quarter of 2018, compared to operating income of $8.2 million and operating margin of 8.8% for the same period in 2017. The third quarter of 2017 includednon-cash impairment charges of $4.1 million or 440 basis points due to decreased demand for barge pumps in the marine transportation market. Excluding the impairment charges, operating margin decreased 40 basis points due principally to an unfavorable LIFO impact.
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Net Income
Three Months Ended September 30, | ||||||||||||||||
2018 | 2017 | $ Change | % Change | |||||||||||||
Income before income taxes | $ | 13,652 | $ | 7,957 | $ | 5,695 | 71.6 | % | ||||||||
% of Net sales | 13.3 | % | 8.5 | % | ||||||||||||
Income taxes | $ | 2,951 | $ | 2,255 | $ | 696 | 30.9 | % | ||||||||
Effective tax rate | 21.6 | % | 28.3 | % | ||||||||||||
Net income | $ | 10,701 | $ | 5,702 | $ | 4,999 | 87.7 | % | ||||||||
% of Net sales | 10.4 | % | 6.1 | % | ||||||||||||
Earnings per share | $ | 0.41 | $ | 0.22 | $ | 0.19 | 86.4 | % |
The Company’s effective tax rate decreased to 21.6% for the third quarter of 2018 from 28.3% for the third quarter of 2017, due primarily to the impact of the Tax Act enacted in December 2017.
The increase in net income in the third quarter of 2018 compared to the same period in 2017 was due primarily to increased sales volume and the decrease in the effective tax rate. Net income in the third quarter of 2018 included an unfavorable LIFO impact of $1.1 million, net of income taxes. Net income in the third quarter of 2017 includednon-cash impairment charges of $2.7 million, net of income taxes, and anon-cash pension settlement charge of $0.3 million, net of income taxes.
Earnings per share for the third quarter of 2018 included an unfavorable LIFO impact of $0.04 per share. Earnings per share for the third quarter of 2017 includednon-cash impairment charges of $0.10 per share and anon-cash pension settlement charge of $0.01 per share.
Nine Months Ended September 30, 2018 vs. Nine Months Ended September 30, 2017
Net Sales
Nine Months Ended September 30, | ||||||||||||||||
2018 | 2017 | $ Change | % Change | |||||||||||||
Net Sales | $ | 311,324 | $ | 284,451 | $ | 26,873 | 9.4 | % |
Net sales for the first nine months of 2018 were $311.3 million compared to $284.5 million for the first nine months of 2017, an increase of 9.4% or $26.9 million. Domestic sales increased 10.9% or $19.8 million and international sales increased 6.9% or $7.1 million compared to the same period in 2017.
Sales in our water markets increased 10.8% or $21.0 million in the first nine months of 2018 compared to the first nine months of 2017. Sales in the fire protection market increased $8.3 million due primarily to improved economic conditions domestically and sales in the construction market increased $5.2 million due primarily to increased oil and gas drilling activity. Sales of repair parts increased $3.4 million driven by the overall increase in sales volume and sales in the municipal market increased $3.2 million due primarily to positive municipal economic sentiment. In addition, sales in the agriculture market increased $0.9 million.
Sales increased 6.5% or $5.9 million in ournon-water markets during the first nine months of 2018 compared to the first nine months of 2017. Sales in the industrial and petroleum markets increased a combined $6.7 million due principally to increased capital spending related to oil and gas drilling activity. These increases were partially offset by decreased sales in the OEM market of $0.8 million.
International sales were $110.1 million in the first nine months of 2018 compared to $103.0 million in the same period last year and represented 35% and 36% of total sales for the Company in each of the two periods, respectively. International sales increased most notably in the fire protection, petroleum and repair parts markets and decreased in the OEM and agriculture markets.
17
Cost of Products Sold and Gross Profit
Nine Months Ended September 30, | ||||||||||||||||
2018 | 2017 | $ Change | % Change | |||||||||||||
Cost of products sold | $ | 227,926 | $ | 208,496 | $ | 19,430 | 9.3 | % | ||||||||
% of Net sales | 73.2 | % | 73.3 | % | ||||||||||||
Gross Margin | 26.8 | % | 26.7 | % |
Gross profit was $83.4 million for the first nine months of 2018, resulting in gross margin of 26.8%, compared to gross profit of $76.0$29.9 million and gross margin of 26.7% for the same period in 2017.2018. Material costs as a percentage of sales were flat in the second quarter of 2019 compared to the same period last year as selling price increases implemented at the beginning of 2019 were realized. The 1070 basis points increasedecrease in gross margin was largelydue principally to the loss of leverage from lower sales volume compared to the second quarter of 2018.
16
Selling, General and Administrative (SG&A) Expenses
Three Months Ended June 30, | ||||||||||||||||
2019 | 2018 | $ Change | % Change | |||||||||||||
Selling, general and administrative expenses | $ | 14,988 | $ | 14,872 | $ | 116 | 0.8 | % | ||||||||
% of Net sales | 13.8 | % | 13.3 | % |
Selling, general and administrative (“SG&A”) expenses were $15.0 million and 13.8% of net sales for the second quarter of 2019 compared to $14.9 million and 13.3% of net sales for the same period in 2018. SG&A expenses as a percentage of sales increased 50 basis points due principally to the loss of leverage from lower sales volume.
Operating Income
Three Months Ended June 30, | ||||||||||||||||
2019 | 2018 | $ Change | % Change | |||||||||||||
Operating income | $ | 13,204 | $ | 14,993 | $ | (1,789 | ) | (11.9 | )% | |||||||
% of Net sales | 12.2 | % | 13.4 | % |
Operating income was $13.2 million, resulting in operating margin of 12.2%, for the second quarter of 2019, compared to operating income of $15.0 million and operating margin of 13.4% for the same period in 2018. Operating margin decreased 120 basis points due principally to the loss of leverage from lower sales volume.
Net Income
Three Months Ended June 30, | ||||||||||||||||
2019 | 2018 | $ Change | % Change | |||||||||||||
Income before income taxes | $ | 13,435 | $ | 12,586 | $ | 849 | 6.7 | % | ||||||||
% of Net sales | 12.4 | % | 11.3 | % | ||||||||||||
Income taxes | $ | 2,955 | $ | 2,413 | $ | 542 | 22.5 | % | ||||||||
Effective tax rate | 22.0 | % | 19.2 | % | ||||||||||||
Net income | $ | 10,480 | $ | 10,173 | $ | 307 | 3.0 | % | ||||||||
% of Net sales | 9.7 | % | 9.1 | % | ||||||||||||
Earnings per share | $ | 0.40 | $ | 0.39 | $ | 0.01 | 2.6 | % |
The Company’s effective tax rate increased to 22.0% for the second quarter of 2019 from 19.2% for the second quarter of 2018 due primarily to pension plan contributions made in the second quarter of 2018 which were eligible for tax deduction at the prior 35.0% federal corporate tax rate.
The increase in net income in the second quarter of 2019 compared to the same period in 2018 of $0.3 million was due primarily to anon-cash pension charge of $1.7 million, net of income taxes, in the second quarter of 2018 that did not recur in the second quarter of 2019.
Earnings per share for the second quarter of 2018 included anon-cash pension settlement charge of $0.07 per share.
17
Six Months Ended June 30, 2019 vs. Six Months Ended June 30, 2018
Net Sales
Six Months Ended June 30, | ||||||||||||||||
2019 | 2018 | $ Change | % Change | |||||||||||||
Net Sales | $ | 205,189 | $ | 208,431 | $ | (3,242 | ) | (1.6 | )% |
Net sales for the first six months of 2019 were $205.2 million compared to $208.4 million for the first six months of 2018, a decrease of 1.6% or $3.2 million. Domestic sales increased 4.8% or $6.6 million while international sales decreased 13.5% or $9.8 million compared to the same period in 2018.
Sales in our water markets decreased 0.5% or $0.7 million in the first six months of 2019 compared to the first six months of 2018. Sales in the municipal market increased $3.7 million driven primarily by infrastructure needs domestically, and sales in the construction market increased $2.7 million due primarily to sales to rental market customers. These increases were offset by decreased sales in the fire protection market of $5.2 million driven by leverage fromsoftness in international markets and in the agriculture market of $1.9 million primarily due to adverse weather conditions.
Sales in ournon-water markets decreased 4.0% or $2.5 million during the first six months of 2019 compared to the first six months of 2018. Sales in the petroleum market increased sales volume partially$0.9 million driven primarily bymid-stream oil and gas customers. This increase was offset by an increasedecreased sales in material coststhe industrial market of $3.1 million due primarily to softness in the upstream oil and gas market and decreased sales in the OEM market of $0.3 million.
International sales were $62.7 million in the first six months of 2019 compared to $72.5 million in the same period last year and represented 31% and 35% of total sales for the Company, respectively. International sales decreased most notably in the fire protection, municipal and construction markets.
Cost of Products Sold and Gross Profit
Six Months Ended June 30, | ||||||||||||||||
2019 | 2018 | $ Change | % Change | |||||||||||||
Cost of products sold | $ | 153,684 | $ | 152,360 | $ | 1,324 | 0.9 | % | ||||||||
% of Net sales | 74.9 | % | 73.1 | % | ||||||||||||
Gross Margin | 25.1 | % | 26.9 | % |
Gross profit was $51.5 million for the first six months of 2019, resulting in gross margin of 25.1%, compared to gross profit of $56.1 million and gross margin of 26.9% for the same period in 2018. Gross margin decreased 180 basis points largely as a result of inflationary pressuresmaterial cost increases due to inflation, tariffs and tariffs.higher freight costs. Gross margin in the second quarter of 2019 improved from the first quarter of 2019 as selling price increases implemented at the beginning of the year were more fully realized.
Selling, General and Administrative Expenses (SG&A) Expenses
Nine Months Ended September 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||
2018 | 2017 | $ Change | % Change | 2019 | 2018 | $ Change | % Change | |||||||||||||||||||||||||
Selling, general and administrative expenses | $ | 43,435 | $ | 41,800 | $ | 1,635 | 3.9 | % | $ | 29,351 | $ | 29,228 | $ | 123 | 0.4 | % | ||||||||||||||||
% of Net sales | 14.0 | % | 14.7 | % | 14.3 | % | 14.0 | % |
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SG&A was $43.4expenses were $29.4 million and 14.3% of net sales for the first six months of 2019 compared to $29.2 million and 14.0% of net sales for the first nine months of 2018 compared to $41.8 million and 14.7% of net sales for the same period in 2017.2018. SG&A expenses as a percentage of sales improved 70increased 30 basis points primarily as a result of loss of leverage from increasedlower sales volume.
Operating Income
Nine Months Ended September 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||
2018 | 2017 | $ Change | % Change | 2019 | 2018 | $ Change | % Change | |||||||||||||||||||||||||
Operating income | $ | 39,963 | $ | 30,057 | $ | 9,906 | 33.0 | % | $ | 22,154 | $ | 26,843 | $ | (4,689 | ) | (17.5 | )% | |||||||||||||||
% of Net sales | 12.8 | % | 10.6 | % | 10.8 | % | 12.9 | % |
Operating income was $40.0$22.2 million, resulting in operating margin of 12.8%10.8%, for the first ninesix months of 2018,2019, compared to operating income of $30.1$26.8 million and operating margin of 10.6%12.9% for the same period in 2017. The first nine months of 2017 includednon-cash impairment charges in the third quarter of $4.1 million or 140 basis points. Excluding the impairment charges, operating2018. Operating margin improved 80decreased 210 basis points due principally to leverage from increased sales volume.material cost increases, which were partially offset by selling price increases.
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Net Income
Nine Months Ended September 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||
2018 | 2017 | $ Change | % Change | 2019 | 2018 | $ Change | % Change | |||||||||||||||||||||||||
Income before income taxes | $ | 38,894 | $ | 27,084 | $ | 11,810 | 43.6 | % | $ | 22,677 | 25,242 | $ | (2,565 | ) | (10.2 | )% | ||||||||||||||||
% of Net sales | 12.5 | % | 9.5 | % | 11.1 | % | 12.1 | % | ||||||||||||||||||||||||
Income taxes | $ | 8,403 | $ | 8,469 | $ | (66 | ) | (0.8 | )% | $ | 4,975 | $ | 5,452 | $ | (477 | ) | (8.7 | )% | ||||||||||||||
Effective tax rate | 21.6 | % | 31.3 | % | 21.9 | % | 21.6 | % | ||||||||||||||||||||||||
Net income | $ | 30,491 | $ | 18,615 | $ | 11,876 | 63.8 | % | $ | 17,702 | $ | 19,790 | $ | (2,088 | ) | (10.6 | )% | |||||||||||||||
% of Net sales | 9.8 | % | 6.5 | % | 8.6 | % | 9.5 | % | ||||||||||||||||||||||||
Earnings per share | $ | 1.17 | $ | 0.71 | $ | 0.46 | 64.8 | % | $ | 0.68 | $ | 0.76 | $ | (0.08 | ) | (10.5 | )% |
The Company’s effective tax rate decreased to 21.6% for the first nine months of 2018 from 31.3% for the first nine months of 2017, due primarily to the impact of the Tax Act enacted in December 2017. Excluding discrete impacts of pension plan contributions and transition tax adjustments, the effective tax rate for the first nine months of 2018 would have been 23.2%.
The increasedecrease in net income in the first ninesix months of 20182019 compared to the same period in 20172018 of 2.1 million was due primarily to increased sales volumematerial cost increases resulting from inflation, tariffs and the decrease in the effective tax rate.higher freight costs. Net income in the first ninesix months of 2018 included an unfavorable LIFO impact of $2.5 million, net of income taxes, andanon-cash pension settlement charges of $2.1 million, net of income taxes. Net income in the first nine months of 2017 includednon-cash impairment charges of $2.7 million, net of income taxes, andnon-cash pension settlement charges of $2.6charge $2.0 million, net of income taxes.
TheEarnings per share for the first ninesix months of 2018 earnings were reduced byincluded anon-cash pension settlement chargescharge of $0.08 per share. The first nine months of 2017 earnings were reduced bynon-cash impairment charges of $0.10 per share andnon-cash pension settlement charges of $0.10 per share.
Liquidity and Capital Resources
Cash and cash equivalents totaled $101.4$62.2 million and there was no outstanding bank debt at SeptemberJune 30, 2018.2019. The Company had $23.5$24.0 million available in bank lines of credit after deducting $7.5$7.0 million in outstanding letters of credit primarily related to customer orders. The Company was in compliance with its debt covenants, including limits on additional borrowings and maintenance of certain operating and financial ratios, at SeptemberJune 30, 20182019 and December 31, 2017.
Subsequent to September 30, 2018, the Board of Directors declared a special dividend of $2.00 per share on the common stock of the Company. The special dividend, totaling approximately $52 million, will be paid on December 10, 2018 to shareholders of record at the close of business on November 15, 2018.
Free cash flow, anon-GAAP financial measure for reporting cash flow, is defined by the Company as adjusted earnings before interest, income taxes and depreciation and amortization, less capital expenditures and dividends. The Company believes free cash flow provides the Company and investors with an important perspective on cash available for investments, acquisitions and working capital requirements.
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The following table reconciles adjusted earnings before interest, income taxes and depreciation and amortization as reconciled above to free cash flow:
Nine Months Ended September 30, | Six Months Ended June 30, | |||||||||||||||
2018 | 2017 | 2019 | 2018 | |||||||||||||
Non-GAAP adjusted earnings before interest, taxes, depreciation and amortization | $ | 52,514 | $ | 46,429 | $ | 29,772 | $ | 35,068 | ||||||||
Less capital expenditures | (7,647 | ) | (4,840 | ) | (3,464 | ) | (5,479 | ) | ||||||||
Less cash dividends | (9,791 | ) | (9,004 | ) | (7,053 | ) | (6,527 | ) | ||||||||
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Non-GAAP free cash flow | $ | 35,076 | $ | 32,585 | $ | 19,255 | $ | 23,062 | ||||||||
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Financial Cash Flow
Nine Months Ended September 30, | Six Months Ended June 30, | |||||||||||||||
2018 | 2017 | 2019 | 2018 | |||||||||||||
Beginning of period cash and cash equivalents | $ | 79,680 | $ | 57,604 | $ | 46,458 | $ | 79,680 | ||||||||
Net cash provided by operating activities | 36,545 | 33,412 | 26,488 | 14,337 | ||||||||||||
Net cash used for investing activities | (3,888 | ) | (7,521 | ) | (3,466 | ) | (2,510 | ) | ||||||||
Net cash used for financing activities | (10,250 | ) | (9,004 | ) | (7,505 | ) | (6,986 | ) | ||||||||
Effect of exchange rate changes on cash | (706 | ) | 1,467 | 190 | (800 | ) | ||||||||||
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Net increase in cash and cash equivalents | 21,701 | 18,354 | 15,707 | 4,041 | ||||||||||||
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End of period cash and cash equivalents | $ | 101,381 | $ | 75,958 | $ | 62,165 | $ | 83,721 | ||||||||
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The increase in cash provided by operating activities in the first nine monthshalf of 20182019 compared to the same period last year was primarily due to increased accounts receivable and inventorylower inventories driven by higher sales volumea planned inventory reduction and an increasedecreases in backlog,income taxes payable and higher income tax payments.pension contributions. These negative effects on cash flow were offset by valuation adjustments to prepaid pension assets.
During the first nine monthshalf of 2018,2019, investing activities of $3.9 million primarily consisted of $7.6 million of capital expenditures for machinery and equipment offset by $3.0 million of proceeds from short-term investments and $0.8 million of proceeds from the sale of property, plant and equipment.$3.5 million. During the first nine monthshalf of 2017,2018, investing activities of $7.5$2.5 million primarily consisted of $3.0 million of purchases of short-term investments and $4.8 million of capital expenditures for machinery and equipment of $5.5 million partially offset by $0.3 million of proceeds from the saleshort-term investments of property, plant and equipment.$3.0 million.
Net cash used for financing activities for the first nine monthshalf of 20182019 and 20172018 primarily consisted of dividend payments of $9.8$7.1 million and $9.0$6.5 million, respectively.
The Company currently expects to continue its exceptional history of paying regular quarterly dividends and increased annual dividends. However, any future dividends will be reviewed individually and declared by our Board of Directors at its discretion, dependent on our assessment of the Company’s financial condition and business outlook at the applicable time.
Critical Accounting Policies
Our critical accounting policies are described in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and in the notes to our Consolidated Financial Statements for the year ended December 31, 20172018 contained in our Annual Report on Form10-K for the year ended December 31, 2017.2018. Any new accounting policies or updates to existing accounting policies as a result of new accounting pronouncements have been discussed in the notes to our consolidated financial statementsConsolidated Financial Statements in this Quarterly Report on Form10-Q. The application of our critical accounting policies may require management to make judgments and estimates about the amounts reflected in the Consolidated Financial Statements. Management uses historical experience and all available information to make these estimates and judgments, and different amounts could be reported using different assumptions and estimates.
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Safe Harbor StatementCautionary Note Regarding Forward-Looking Statements
In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, The Gorman-Rupp Company provides the following cautionary statement: This Form10-Q contains various forward-looking statements based on assumptions concerning The Gorman-Rupp Company’s operations, future results and prospects. These forward-looking statements are based on current expectations about important economic, political, and technological factors, among others, and are subject to risks and uncertainties, which could cause the actual results or events to differ materially from those set forth in or implied by the forward-looking statements and related assumptions.
Such factors include, but are not limited to: (1) continuation of the current and projected future business environment; (2) highly competitive markets; (3) availability and costs of raw materials;materials, and our ability to mitigate cost increases through selling price adjustments; (4) loss of key management; (5) cyber security threats; (6) acquisition performance and integration; (7) compliance with, and costs related to, a variety of import and export laws and regulations; (8) environmental compliance costs and liabilities; (9) exposure to fluctuations in foreign currency exchange rates; (10) conditions in foreign countries in which we conductThe Gorman-Rupp Company conducts business; (11) changes in our tax rates and exposure to additional income tax liabilities; (12) impairment in the value of intangible assets, including goodwill; (13) defined benefit pension plan settlement expense; (14) family ownership of common equity; and (15) risks described from time to time in our reports filed with the Securities and Exchange Commission. Except to the extent required by law, we do not undertake and specifically decline any obligation to review or update any forward-looking statements or to publicly announce the results of any revisions to any of such statements to reflect future events or developments or otherwise.
ITEM 3. |
The Company is subject to market risk associated principally with changesfluctuations in foreign currency exchange rates. The Company’s foreign currency exchange rate risk is limited primarily to the Euro, the Canadian Dollar, the South African Rand and the British Pound. The Company manages its foreign exchange risk principally through invoicing customers in the same currency as is used in the market of the source of products. The foreign currency transaction gains (losses) for the first nine monthshalf of 20182019 and the first nine monthshalf of 20172018 were $(0.6) million$74,000 and $0.4$(0.5) million, respectively, and are reported within otherOther income (expense), net on the Consolidated Statements of Income. Beginning on January 1, 2019, the Company began recognizing unrealized foreign exchange gains and losses within Accumulated other comprehensive loss.
ITEM 4. |
Evaluation of Disclosure Controls and Procedures
The Company maintains a set of disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. The Company’s disclosure controls and procedures are also designed to ensure that information required to be disclosed in Company reports filed under the Securities Exchange Act of 1934 is accumulated and communicated to the Company’s Management,management, including the principal executive officer and the principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
An evaluation was carried out under the supervision and with the participation of the Company’s Management,management, including the principal executive officer and the principal financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this report on Form10-Q. Based on that evaluation, the principal executive officer and the principal financial officer have concluded that the Company’s disclosure controls and procedures were effective as of SeptemberJune 30, 2018.2019.
Changes in Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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ITEM 1. | LEGAL PROCEEDINGS |
There are no material changes from the legal proceedings previously reported in the Company’s Annual Report on Form10-K for the fiscal year ended December 31, 2017.2018.
ITEM 1A. | RISK FACTORS |
There are no material changes from the risk factors previously reported in the Company’s Annual Report on Form10-K for the fiscal year ended December 31, 2017.2018.
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ITEM 6. | EXHIBITS |
Exhibit 31.1 | ||
Exhibit 31.2 | ||
Exhibit 32 | ||
Exhibit 101 | Financial statements from the Quarterly Report on Form10-Q of The Gorman-Rupp Company for the quarter ended |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
The Gorman-Rupp Company | ||||
(Registrant) | ||||
Date: | ||||
By: | /s/James C. Kerr | |||
James C. Kerr | ||||
Vice President and Chief Financial Officer |
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