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 September 30, 2019March 31, 2020
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 Symbol(s) | Name of each exchange on which registered | ||
| 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 ☒
On October 25, 2019,April 24, 2020 there were 26,133,39326,091,492 common shares, without par value, of The Gorman-Rupp Company outstanding.
The Gorman-Rupp Company
Three and Nine Months Ended September 30,March 31, 2020 and 2019 and 2018
ITEM 1—1 - FINANCIAL STATEMENTS (UNAUDITED)
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
See notes to consolidated financial statements (unaudited).
THE GORMAN-RUPP COMPANY
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
| (Dollars in thousands) | March 31, 2020 | December 31, 2019 | ||||||
| Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 82,436 | $ | 80,555 | ||||
Accounts receivable, net | 62,896 | 65,433 | ||||||
Inventories, net | 77,782 | 75,997 | ||||||
Prepaid and other | 6,384 | 5,680 | ||||||
|
|
|
| |||||
Total current assets | 229,498 | 227,665 | ||||||
Property, plant and equipment, net | 109,825 | 111,779 | ||||||
Other assets | 8,684 | 8,320 | ||||||
Goodwill and other intangible assets, net | 34,340 | 34,996 | ||||||
|
|
|
| |||||
Total assets | $ | 382,347 | $ | 382,760 | ||||
|
|
|
| |||||
| Liabilities and equity | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 15,024 | $ | 16,030 | ||||
Payroll and employee related liabilities | 11,300 | 12,172 | ||||||
Commissions payable | 6,381 | 7,034 | ||||||
Deferred revenue and customer deposits | 5,586 | 4,911 | ||||||
Accrued expenses | 6,573 | 5,348 | ||||||
|
|
|
| |||||
Total current liabilities | 44,864 | 45,495 | ||||||
Pension benefits | 1,274 | 1,040 | ||||||
Postretirement benefits | 24,442 | 24,453 | ||||||
Other long-term liabilities | 3,419 | 3,894 | ||||||
|
|
|
| |||||
Total liabilities | 73,999 | 74,882 | ||||||
Equity: | ||||||||
Common shares, without par value: | ||||||||
Authorized – 35,000,000 shares; | ||||||||
Outstanding – 26,091,492 shares at March 31, 2020 and 26,067,502 shares at December 31, 2019 (after deducting treasury shares of 957,304 and 981,294, respectively), at stated capital amounts | 5,096 | 5,091 | ||||||
Additionalpaid-in capital | 600 | 1,147 | ||||||
Retained earnings | 331,971 | 330,177 | ||||||
Accumulated other comprehensive loss | (29,319 | ) | (28,537 | ) | ||||
|
|
|
| |||||
Total equity | 308,348 | 307,878 | ||||||
|
|
|
| |||||
Total liabilities and equity | $ | 382,347 | $ | 382,760 | ||||
|
|
|
| |||||
See notes to consolidated financial statements (unaudited).
THE GORMAN-RUPP COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
| Three Months Ended March 31, | ||||||||
| (Dollars in thousands) | 2020 | 2019 | ||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 5,486 | $ | 7,222 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 3,182 | 3,566 | ||||||
Pension expense | 2,225 | 659 | ||||||
Stock based compensation | (93 | ) | 55 | |||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable, net | 1,951 | 1,940 | ||||||
Inventories, net | (2,906 | ) | 1,893 | |||||
Accounts payable | (786 | ) | (342 | ) | ||||
Commissions payable | (605 | ) | (1,866 | ) | ||||
Deferred revenue and customer deposits | 675 | 768 | ||||||
Income taxes | 1,781 | 714 | ||||||
Accrued expenses and other | (907 | ) | (2,122 | ) | ||||
Benefit obligations | (1,571 | ) | (2,828 | ) | ||||
|
|
|
| |||||
Net cash provided by operating activities | 8,432 | 9,659 | ||||||
Cash used for investing activities, capital additions | (1,667 | ) | (2,124 | ) | ||||
Cash used for financing activities: | ||||||||
Cash dividends | (3,780 | ) | (3,526 | ) | ||||
Treasury share repurchases | (361 | ) | — | |||||
Other | (284 | ) | (417 | ) | ||||
|
|
|
| |||||
Net cash used for financing activities | (4,425 | ) | (3,943 | ) | ||||
Effect of exchange rate changes on cash | (459 | ) | 127 | |||||
|
|
|
| |||||
Net increase in cash and cash equivalents | 1,881 | 3,719 | ||||||
Cash and cash equivalents: | ||||||||
Beginning of period | 80,555 | 46,458 | ||||||
|
|
|
| |||||
End of period | $ | 82,436 | $ | 50,177 | ||||
|
|
|
| |||||
See notes to consolidated financial statements (unaudited).
THE GORMAN-RUPP COMPANY
CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)
| Three Months Ended March 31, 2020 | ||||||||||||||||||||||||
| (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, 2019 | 26,067,502 | $ | 5,091 | $ | 1,147 | $ | 330,177 | $ | (28,537 | ) | $ | 307,878 | ||||||||||||
Net income | 5,486 | 5,486 | ||||||||||||||||||||||
Other comprehensive income | (782 | ) | (782 | ) | ||||||||||||||||||||
Stock based compensation | 23,990 | 5 | (547 | ) | 88 | (454 | ) | |||||||||||||||||
Cash dividends—$0.145 per share | (3,780 | ) | (3,780 | ) | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Balances March 31, 2020 | 26,091,492 | $ | 5,096 | $ | 600 | $ | 331,971 | $ | (29,319 | ) | $ | 308,348 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
| Three Months Ended March 31, 2019 | ||||||||||||||||||||||||
| (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 | ) | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Balances March 31, 2019 | 26,123,692 | $ | 5,103 | $ | 2,458 | $ | 312,645 | $ | (23,259 | ) | $ | 296,947 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
See notes to consolidated financial statements (unaudited).
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
| (Dollars in thousands) | September 30, 2019 | December 31, 2018 | ||||||
| Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 85,702 | $ | 46,458 | ||||
Accounts receivable, net | 63,505 | 67,714 | ||||||
Inventories, net | 73,599 | 87,387 | ||||||
Prepaid and other | 5,440 | 7,127 | ||||||
|
|
|
| |||||
Total current assets | 228,246 | 208,686 | ||||||
Property, plant and equipment, net | 111,353 | 113,493 | ||||||
Other assets | 8,711 | 5,101 | ||||||
Prepaid pension assets | 3,994 | 4,817 | ||||||
Goodwill and other intangible assets, net | 35,113 | 36,185 | ||||||
|
|
|
| |||||
Total assets | $ | 387,417 | $ | 368,282 | ||||
|
|
|
| |||||
| Liabilities and equity | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 15,419 | $ | 16,678 | ||||
Payroll and employee related liabilities | 15,946 | 12,651 | ||||||
Commissions payable | 6,557 | 9,222 | ||||||
Deferred revenue and customer deposits | 6,440 | 5,232 | ||||||
Accrued expenses | 6,840 | 4,682 | ||||||
|
|
|
| |||||
Total current liabilities | 51,202 | 48,465 | ||||||
Postretirement benefits | 21,028 | 21,853 | ||||||
Other long-term liabilities | 4,875 | 4,832 | ||||||
|
|
|
| |||||
Total liabilities | 77,105 | 75,150 | ||||||
Equity: | ||||||||
Common shares, without par value: | ||||||||
Authorized – 35,000,000 shares; | ||||||||
Outstanding – 26,133,393 shares at September 30, 2019 and 26,117,045 shares at December 31, 2018 (after deducting treasury shares of 915,403 and 931,751, respectively), at stated capital amounts | 5,106 | 5,102 | ||||||
Additionalpaid-in capital | 2,895 | 2,539 | ||||||
Retained earnings | 325,880 | 308,914 | ||||||
Accumulated other comprehensive loss | (23,569 | ) | (23,423 | ) | ||||
|
|
|
| |||||
Total equity | 310,312 | 293,132 | ||||||
|
|
|
| |||||
Total liabilities and equity | $ | 387,417 | $ | 368,282 | ||||
|
|
|
| |||||
See notes to consolidated financial statements (unaudited).
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
| Nine Months Ended September 30, | ||||||||
| (Dollars in thousands) | 2019 | 2018 | ||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 27,477 | $ | 30,491 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 10,563 | 10,884 | ||||||
Pension expense | 2,117 | 4,301 | ||||||
Contributions to pension plan | — | (4,000 | ) | |||||
Stock based compensation | 426 | 1,081 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable, net | 3,733 | (5,962 | ) | |||||
Inventories, net | 13,291 | (7,811 | ) | |||||
Accounts payable | (1,008 | ) | 1,857 | |||||
Commissions payable | (2,575 | ) | 3,062 | |||||
Deferred revenue and customer deposits | 1,208 | (210 | ) | |||||
Income taxes | 3,175 | (2,738 | ) | |||||
Accrued expenses and other | (1,454 | ) | (390 | ) | ||||
Benefit obligations | 1,394 | 5,980 | ||||||
|
|
|
| |||||
Net cash provided by operating activities | 58,347 | 36,545 | ||||||
Cash used for investing activities: | ||||||||
Capital additions | (8,027 | ) | (7,647 | ) | ||||
Proceeds from sale of property, plant and equipment | 42 | 791 | ||||||
Proceeds (purchases) of short-term investments, net | — | 2,968 | ||||||
|
|
|
| |||||
Net cash used for investing activities | (7,985 | ) | (3,888 | ) | ||||
Cash used for financing activities: | ||||||||
Cash dividends | (10,581 | ) | (9,791 | ) | ||||
Other | (482 | ) | (459 | ) | ||||
|
|
|
| |||||
Net cash used for financing activities | (11,063 | ) | (10,250 | ) | ||||
Effect of exchange rate changes on cash | (55 | ) | (706 | ) | ||||
|
|
|
| |||||
Net increase in cash and cash equivalents | 39,244 | 21,701 | ||||||
Cash and cash equivalents: | ||||||||
Beginning of period | 46,458 | 79,680 | ||||||
|
|
|
| |||||
End of period | $ | 85,702 | $ | 101,381 | ||||
|
|
|
| |||||
See notes to consolidated financial statements (unaudited).
CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)
| Nine Months Ended September 30, 2019 | ||||||||||||||||||||||||
| (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 | ) | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
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 | ) | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Balances June 30, 2019 | 26,124,393 | $ | 5,104 | $ | 2,943 | $ | 319,600 | $ | (22,298 | ) | $ | 305,349 | ||||||||||||
Net income | 9,775 | 9,775 | ||||||||||||||||||||||
Other comprehensive loss | (1,271 | ) | (1,271 | ) | ||||||||||||||||||||
Stock based compensation | 9,000 | 2 | (48 | ) | 33 | (13 | ) | |||||||||||||||||
Cash dividends - $0.135 per share | (3,528 | ) | (3,528 | ) | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Balances September 30, 2019 | 26,133,393 | $ | 5,106 | $ | 2,895 | $ | 325,880 | $ | (23,569 | ) | $ | 310,312 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
| Nine Months Ended September 30, 2018 | ||||||||||||||||||||||||
| (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 | ) | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
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 | ) | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Balances June 30, 2018 | 26,108,045 | $ | 5,100 | $ | 564 | $ | 345,647 | $ | (11,744 | ) | $ | 339,567 | ||||||||||||
Net income | 10,701 | 10,701 | ||||||||||||||||||||||
Other comprehensive income | 425 | 425 | ||||||||||||||||||||||
Stock based compensation | 9,000 | 2 | 276 | 32 | 310 | |||||||||||||||||||
Cash dividends - $0.125 per share | (3,264 | ) | (3,264 | ) | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Balances September 30, 2018 | 26,117,045 | $ | 5,102 | $ | 840 | $ | 353,116 | $ | (11,319 | ) | $ | 347,739 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
See notes to consolidated financial statements (unaudited).
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 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 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 nine months ended September 30, 2019March 31, 2020 are not necessarily indicative of results that may be expected for the year ending December 31, 2019.2020. For further information, refer to the Consolidated Financial Statements and accompanying notes included in the Company’s Annual Report on Form10-K for the year ended December 31, 2018,2019, from which related information herein has been derived.
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.
In December 2019, the FASB issued ASU2019-12, “Simplifying the Accounting for Income Taxes”, which, as part of its Simplification Initiative to reduce the cost and complexity in accounting for income taxes, removes certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. ASU2019-12 also amends other aspects of the guidance to help simplify and promote consistent application of GAAP. The guidance is effective for interim and annual periods beginning after December 15, 2020, with early adoption permitted. The Company currently does not expect the adoption of ASU2019-12 will have a material impact on the Company’s Consolidated Financial Statements.
In August 2018, the FASB issued ASU2018-14, “Compensation-Retirement Benefits-Defined Benefit Plans-General (Topic715-20): Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans”, which improves disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. This standard is effective for fiscal years ending after December 15, 2020, for public business entities. Early adoption is permitted for all entities. An entity should apply the amendments in this Update on a retrospective basis to all periods presented. The Company currently does not expect the adoption of ASU2019-12 will have a material impact on the Company’s Consolidated Financial Statements.
Recently Adopted Accounting Standards
In FebruaryJune 2016, the FASB issued ASU2016-02,2016-13, “Leases“Financial Instruments-Credit Losses (Topic 842)326): Measurement of Credit Losses on Financial Instruments”,” which requires lessees to recognize assets and liabilities onreplaced the balance sheet for the rights and obligations created by all leasesincurred loss impairment methodology under current GAAP with a termmethodology that reflects expected credit losses and requires consideration of more than one year. Accounting by lessors remains similara broader range of reasonable and supportable information to inform credit loss estimates. ASUpre-existing2016-13 U.S. GAAP. Subsequent accounting standards updates have beenrequires use of a forward-looking expected credit loss model for accounts receivables, loans, and other financial instruments. ASU2016-13 is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. Adoption of the standard requires using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the effective date to align existing credit loss methodology with the new standard. In November 2019, the FASB issued which amend and/or clarifyASU2019-11, Codification Improvements to Topic 326, Financial Instruments—Credit Losses. ASU2019-11 requires entities that did not adopt the applicationamendments in ASU2016-13 as of November 2019 to adopt ASU2016-02.2019-11. This ASU contains the same effective dates and transition requirements as ASU2016-13. The Company adopted Topic 842326 effective January 1, 2019. See Note 9, Leases for further details.2020. The impact of adoption of these standards was not material on the Company’s Consolidated Financial Statements.
NOTE 3 - REVENUE
Disaggregation of Revenue
The following tables disaggregate total net sales by major product category and geographic location:
| Product Category | ||||||||||||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | Product Category | ||||||||||||||||||||||
| 2019 | 2018 | 2019 | 2018 | March 31, 2020 | March 31, 2019 | |||||||||||||||||||
Pumps and pump systems | $ | 86,114 | $ | 89,835 | $ | 260,913 | $ | 268,485 | $ | 78,299 | $ | 82,522 | ||||||||||||
Repair parts for pumps and pump systems and other | 13,184 | 13,058 | 43,574 | 42,839 | 13,372 | 14,337 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total net sales | $ | 99,298 | $ | 102,893 | $ | 304,487 | $ | 311,324 | $ | 91,671 | $ | 96,859 | ||||||||||||
|
|
|
|
|
| |||||||||||||||||||
| Geographic Location | Geographic Location | |||||||||||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | March 31, 2020 | March 31, 2019 | |||||||||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||
United States | $ | 69,491 | $ | 65,285 | $ | 211,976 | $ | 201,237 | $ | 65,368 | $ | 67,702 | ||||||||||||
Foreign countries | 29,807 | 37,608 | 92,511 | 110,087 | 26,303 | 29,157 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total net sales | $ | 99,298 | $ | 102,893 | $ | 304,487 | $ | 311,324 | $ | 91,671 | $ | 96,859 | ||||||||||||
|
|
|
|
|
| |||||||||||||||||||
International sales represented approximately 30%29% and 37%30% of total net sales for the thirdfirst quarter of 20192020 and 2018,2019, respectively, 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 products 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.
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. The Company’s method for recognizing revenue over time is the percentage of completion method, whereby progress towards completion is measured by applying an input measure based on costs incurred to date relative to total estimated costs at completion.
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 and represent assurance-type warranties.
Shipping and handling activities related to products sold to customers, whether performed before or after the customer obtains control of the products, are generally accounted for as activities to fulfill the promise to transfer the products and not as a separate performance obligation.
On September 30, 2019,March 31, 2020, the Company had $101.4$113.8 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.
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) in the 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 in the Consolidated Balance Sheets as a component of Other assets and Deferred revenue and customer deposits, respectively, on acontract-by-contract basis at the end of each reporting period.
The Company’s contract assets and liabilities as of September 30, 2019March 31, 2020 and December 31, 2018, respectively,2019 were as follows:
| September 30, 2019 | December 31, 2018 | March 31, 2020 | December 31, 2019 | |||||||||||||
Contract assets | $ | 1,290 | $ | 1,953 | $ | — | $ | 393 | ||||||||
Contract liabilities | $ | 6,440 | $ | 5,232 | $ | 5,586 | $ | 4,911 | ||||||||
Revenue recognized for the ninethree months ended September 30,March 31, 2020 and 2019 and 2018 that was included in the contract liabilities balance at the beginning of the period was $4.4$2.8 million and $3.4$2.4 million, respectively.
NOTE 4 - INVENTORIES
LIFO 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. Replacement cost approximates current cost and the excess over LIFO cost is approximately $64.0$63.2 million and $63.7$62.5 million at September 30, 2019March 31, 2020 and December 31, 2018,2019, respectively. Allowances for excess and obsolete inventory totaled $5.8 million and $5.9 million and $5.3 million at September 30, 2019March 31, 2020 and December 31, 2018,2019, respectively. Some inventory levels were reduced during the third quarter of 2019, resulting in liquidation of some LIFO levels carried at lower costs from earlier years versus current year costs. The related effect increased net income by approximately $0.8 million during the third quarter of 2019. 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.
Inventories are comprised of the following:
Inventories, net: | September 30, 2019 | December 31, 2018 | March 31, 2020 | December 31, 2019 | ||||||||||||
Raw materials andin-process | $ | 14,809 | $ | 21,773 | $ | 18,713 | $ | 16,474 | ||||||||
Finished parts | 48,384 | 54,209 | 47,255 | 47,317 | ||||||||||||
Finished products | 10,406 | 11,405 | 11,814 | 12,206 | ||||||||||||
|
|
|
| |||||||||||||
Total net inventories | $ | 73,599 | $ | 87,387 | $ | 77,782 | $ | 75,997 | ||||||||
|
|
|
| |||||||||||||
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, net consist of the following:
| September 30, 2019 | December 31, 2018 | March 31, 2020 | December 31, 2019 | |||||||||||||
Land | $ | 4,936 | $ | 3,869 | $ | 4,968 | $ | 4,998 | ||||||||
Buildings | 109,143 | 106,940 | 109,758 | 110,162 | ||||||||||||
Machinery and equipment | 181,417 | 177,668 | 183,622 | 182,922 | ||||||||||||
|
|
|
| |||||||||||||
| 295,496 | 288,477 | 298,348 | 298,082 | |||||||||||||
Less accumulated depreciation | (184,143 | ) | (174,984 | ) | (188,523 | ) | (186,303 | ) | ||||||||
|
|
|
| |||||||||||||
Property, plant and equipment, net | $ | 111,353 | $ | 113,493 | $ | 109,825 | $ | 111,779 | ||||||||
|
|
|
| |||||||||||||
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 Cost of products sold. Changes in the Company’s product warranties liability are:
| September 30, | ||||||||
| 2019 | 2018 | |||||||
Balance at beginning of year | $ | 1,380 | $ | 1,098 | ||||
Provision | 1,350 | 803 | ||||||
Claims | (1,254 | ) | (904 | ) | ||||
|
|
|
| |||||
Balance at end of period | $ | 1,476 | $ | 997 | ||||
|
|
|
| |||||
| March 31, | ||||||||
| 2020 | 2019 | |||||||
Balance at beginning of year | $ | 1,438 | $ | 1,380 | ||||
Provision | 294 | 479 | ||||||
Claims | (302 | ) | (355 | ) | ||||
|
|
|
| |||||
Balance at end of period | $ | 1,430 | $ | 1,504 | ||||
|
|
|
| |||||
NOTE 7 - PENSION AND OTHER POSTRETIREMENT BENEFITS
The Company sponsors a defined benefit pension 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 defined benefit pension plan. Employees hired prior to this date continue to accrue 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 eligible spouses and dependent children. The Company funds the cost of these benefits as incurred.
The following tables present the components of net periodic benefit costs:
| Pension Benefits | Postretirement Benefits | Pension Benefits | Postretirement Benefits | |||||||||||||||||||||||||||||
| Three Months Ended September 30, | Three Months Ended September 30, | Three Months Ended March 31, | Three Months Ended March 31, | |||||||||||||||||||||||||||||
| 2019 | 2018 | 2019 | 2018 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||
Service cost | $ | 551 | $ | 562 | $ | 271 | $ | 194 | $ | 684 | $ | 567 | $ | 343 | $ | 271 | ||||||||||||||||
Interest cost | 614 | 644 | 235 | 141 | 535 | 646 | 194 | 235 | ||||||||||||||||||||||||
Expected return on plan assets | (890 | ) | (1,073 | ) | — | — | (985 | ) | (945 | ) | — | — | ||||||||||||||||||||
Amortization of prior service cost | — | — | (282 | ) | (283 | ) | — | — | (282 | ) | (282 | ) | ||||||||||||||||||||
Recognized actuarial loss (gain) | 431 | 388 | 7 | (103 | ) | |||||||||||||||||||||||||||
Recognized actuarial loss | 513 | 391 | 77 | 7 | ||||||||||||||||||||||||||||
Settlement loss | 120 | — | — | 1,478 | — | — | — | |||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Net periodic benefit cost (gain) (a) | $ | 706 | $ | 641 | $ | 231 | $ | (51 | ) | $ | 2,225 | $ | 659 | $ | 332 | $ | 231 | |||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
| Pension Benefits | Postretirement Benefits | |||||||||||||||||||||||||||||||
| Nine Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||||||||
Service cost | $ | 1,653 | $ | 1,857 | $ | 812 | $ | 582 | ||||||||||||||||||||||||
Interest cost | 1,841 | 1,882 | 706 | 422 | ||||||||||||||||||||||||||||
Expected return on plan assets | (2,671 | ) | (3,380 | ) | — | — | ||||||||||||||||||||||||||
Amortization of prior service cost | — | — | (846 | ) | (847 | ) | ||||||||||||||||||||||||||
Recognized actuarial loss (gain) | 1,294 | 1,206 | 21 | (310 | ) | |||||||||||||||||||||||||||
Settlement loss | — | 2,736 | — | — | ||||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Net periodic benefit cost (gain) (a) | $ | 2,117 | $ | 4,301 | $ | 693 | $ | (153 | ) | |||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
| (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. |
During the three months ended March 31, 2020, the Company recorded a settlement loss relating to retirees that receivedlump-sum distributions from the Company’s defined benefit pension plan totaling $1.5 million. This charge was the result oflump-sum payments to retirees which exceeded the Plan’s actuarial service and interest cost thresholds.
NOTE 8 - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The reclassifications out of Accumulated 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 March 31, | ||||||||||||||||||||||
| 2019 | 2018 | 2019 | 2018 | 2020 | 2019 | |||||||||||||||||||
Pension and other postretirement benefits: | ||||||||||||||||||||||||
Recognized actuarial loss (a) | $ | 438 | $ | 285 | $ | 1,315 | $ | 896 | $ | 590 | $ | 398 | ||||||||||||
Settlement loss | — | 120 | — | 2,736 | 1,478 | — | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total before income tax | $ | 438 | $ | 405 | $ | 1,315 | $ | 3,632 | $ | 2,068 | $ | 398 | ||||||||||||
Income tax | (98 | ) | (97 | ) | (281 | ) | (893 | ) | (489 | ) | (82 | ) | ||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Net of income tax | $ | 340 | $ | 308 | $ | 1,034 | $ | 2,739 | $ | 1,579 | $ | 316 | ||||||||||||
|
|
|
|
|
| |||||||||||||||||||
| (a) | The recognized actuarial loss |
|
The components of Accumulated 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, 2018 | $ | (8,243 | ) | $ | (15,180 | ) | $ | (23,423 | ) | |||
Reclassification adjustments | — | 1,315 | 1,315 | |||||||||
Current period benefit | (1,180 | ) | — | (1,180 | ) | |||||||
Income tax benefit (charge) | — | (281 | ) | (281 | ) | |||||||
|
|
|
|
|
| |||||||
Balance at September 30, 2019 | $ | (9,423 | ) | $ | (14,146 | ) | $ | (23,569 | ) | |||
|
|
|
|
|
| |||||||
| 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 benefit | (1,549 | ) | — | (1,549 | ) | |||||||
Income tax charge | — | (893 | ) | (893 | ) | |||||||
|
|
|
|
|
| |||||||
Balance at September 30, 2018 | $ | (6,870 | ) | $ | (4,449 | ) | $ | (11,319 | ) | |||
|
|
|
|
|
| |||||||
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.
| Currency Translation Adjustments | Pension and Other Postretirement Benefits | Accumulated Other Comprehensive Income (Loss) | ||||||||||
Balance at December 31, 2019 | $ | (8,155 | ) | $ | (20,382 | ) | $ | (28,537 | ) | |||
Reclassification adjustments | — | 2,068 | 2,068 | |||||||||
Current period charge | (2,361 | ) | — | (2,361 | ) | |||||||
Income tax benefit (charge) | — | (489 | ) | (489 | ) | |||||||
|
|
|
|
|
| |||||||
Balance at March 31, 2020 | $ | (10,516 | ) | $ | (18,803 | ) | $ | (29,319 | ) | |||
|
|
|
|
|
| |||||||
| 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 | — | 398 | 398 | |||||||||
Current period charge | (185 | ) | — | (185 | ) | |||||||
Income tax benefit (charge) | 33 | (82 | ) | (49 | ) | |||||||
|
|
|
|
|
| |||||||
Balance at March 31, 2019 | $ | (8,395 | ) | $ | (14,864 | ) | $ | (23,259 | ) | |||
|
|
|
|
|
| |||||||
The Company is currently a lessee under a number of operating leases and two finance leases for certain offices, 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 leases for up to 5 years, and some of which include options to terminate the leases within 1 year. These leases do not have significant rent escalation holidays, concessions, leasehold improvement incentives, or otherbuild-out clauses. Further, the leases do not contain contingent rent provisions.
Supplemental information related to leases and the Company’s Consolidated Financial Statements is as follows:
| Three Months Ended September 30, 2019 | Nine Months Ended September 30, 2019 | |||||||
Components of lease costs: | ||||||||
Operating lease costs | $ | 153 | $ | 420 | ||||
Short-term lease costs | 67 | 243 | ||||||
Finance lease costs | 36 | 72 | ||||||
|
|
|
| |||||
Total lease costs | $ | 256 | $ | 735 | ||||
|
|
|
| |||||
| ||||||||
| ||||||||
| ||||||||
| ||||||||
| ||||||||
| ||||||||
| September 30, 2019 | ||||||||||||
| Operating Leases | Financing Leases | Total Leases | ||||||||||
Other assets -right-of-use assets | $ | 1,270 | $ | 570 | $ | 1,840 | ||||||
|
|
|
|
|
| |||||||
Lease liabilities included in: | ||||||||||||
Accrued expenses - current portion of lease liabilities | $ | 560 | $ | 120 | $ | 680 | ||||||
Other long-term liabilities -non-current portion of lease liabilities | 700 | 460 | 1,160 | |||||||||
|
|
|
|
|
| |||||||
Total lease liabilities | $ | 1,260 | $ | 580 | $ | 1,840 | ||||||
|
|
|
|
|
| |||||||
Maturities of lease liabilities are as follows:
| September 30, 2019 | December 31, 2018 | |||||||
2019 | $ | 238 | $ | 702 | ||||
2020 | 645 | 411 | ||||||
2021 | 481 | 260 | ||||||
2022 | 311 | 124 | ||||||
2023 | 221 | 75 | ||||||
Thereafter | 45 | 10 | ||||||
|
|
|
| |||||
Total lease payments | $ | 1,941 | $ | 1,582 | ||||
|
| |||||||
Less: Interest | (101 | ) | ||||||
|
| |||||||
Present value of lease liabilities | $ | 1,840 | ||||||
|
| |||||||
| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
(Dollars in thousands, except for per share amounts)
The following discussion and analysis of the Company’s financial condition and Results of Operations should be read in conjunction with the 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 and accompanying notes, 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, 2018.2019. While the recent outbreak of the coronavirus(COVID-19) did not have a material adverse effect on the Company’s reported results for the first quarter, the Company is actively monitoring the impact of the coronavirus outbreak, which could negatively impact the Company’s business and results of operations for the second quarter and beyond. The extent to which the Company’s operations will be impacted by the outbreak will depend largely on future developments, which are highly uncertain and cannot be accurately predicted, including new information which may emerge concerning the severity of the outbreak and actions by government authorities to contain the outbreak or treat its impact, among other things.
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 2018.2020. 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.
| Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||
| 2019 | 2018 | 2019 | 2018 | 2020 | 2019 | |||||||||||||||||||
Adjusted earnings per share: | ||||||||||||||||||||||||
Reported earnings per share – GAAP basis | $ | 0.37 | $ | 0.41 | $ | 1.05 | $ | 1.17 | $ | 0.21 | $ | 0.28 | ||||||||||||
Plus pension settlement charge per share | — | — | — | 0.08 | ||||||||||||||||||||
Plus pension settlement charges per share | 0.04 | — | ||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Non-GAAP adjusted earnings per share | $ | 0.37 | $ | 0.41 | $ | 1.05 | $ | 1.25 | $ | 0.25 | $ | 0.28 | ||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Adjusted earnings before interest, taxes, depreciation and amortization: | ||||||||||||||||||||||||
Reported net income–GAAP basis | $ | 9,775 | $ | 10,701 | $ | 27,477 | $ | 30,491 | $ | 5,486 | $ | 7,222 | ||||||||||||
Plus income taxes | 2,132 | 2,951 | 7,107 | 8,403 | 1,404 | 2,020 | ||||||||||||||||||
Plus depreciation and amortization | 3,468 | 3,674 | 10,563 | 10,884 | 3,182 | 3,566 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Non-GAAP earnings before interest, taxes, depreciation and amortization | 15,375 | 17,326 | 45,147 | 49,778 | 10,072 | 12,808 | ||||||||||||||||||
Plus pension settlement charge | — | 120 | — | 2,736 | ||||||||||||||||||||
Plus pension settlement charges | 1,478 | — | ||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Non-GAAP adjusted earnings before interest, taxes, depreciation and amortization | $ | 15,375 | $ | 17,446 | $ | 45,147 | $ | 52,514 | $ | 11,550 | $ | 12,808 | ||||||||||||
|
|
|
|
|
| |||||||||||||||||||
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.
Gorman-Rupp actively pursues 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 pastfor more than 85 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 and preserve a strong balance sheet to position us to weather theCOVID-19 pandemic and, for future acquisition and product development opportunities. The Company had no bank debt as of September 30, 2019.March 31, 2020. The Company’s cash position increased $39.2$1.9 million during the first ninethree months of 20192020 to $85.7$82.4 million at September 30, 2019March 31, 2020 and the Company generated $45.1$11.6 million in adjusted earnings before interest, taxes, depreciation and amortization during the same period.
Capital expenditures for the first ninethree months of 2019 were $8.0$1.7 million and consisted primarily of machinery and equipment. Capital expenditures for the full-year 20192020 are presently planned to be in the range of$15-10-$1715 million primarily for building expansionimprovements and machinery and equipment purchases, and are expected to be financed through internally-generated funds.
Net sales for the thirdfirst quarter of 20192020 were $99.3$91.7 million compared to net sales of $102.9$96.9 million for the thirdfirst quarter of 2018,2019, a decrease of 3.5%5.4% or $3.6$5.2 million. Domestic sales increased 6.4%decreased 3.4% or $4.2$2.3 million whileand international sales decreased 20.7%9.8% or $7.8$2.9 million compared to the same period in 2018.2019.
Gross profit was $25.8$23.4 million for the thirdfirst quarter of 2019,2020, resulting in gross margin of 26.0%25.6%, compared to gross profit of $27.3$23.3 million and gross margin of 26.6%24.1% for the same period in 2018. The 602019. Gross margin improved 150 basis points decrease in gross margin was due principally to product mixlower material costs of 270 basis points as a result of the stabilization of material costs and selling price increases implemented in 2019 being fully realized. Partially offsetting these improvements was loss of leverage on fixed labor and overhead from lower sales volume compared to the thirdfirst quarter of 2018, partially offset by a favorable LIFO impact of 120 basis points. The LIFO impact on gross margin was positive in the third quarter of 2019 due to declining inventory levels as compared to amounts in inventory at December 31, 2018.2019.
Selling, general and administrative (“SG&A”) expenses were $14.2$14.9 million and 14.3%16.2% of net sales for the thirdfirst quarter of 20192020 compared to $14.2$14.4 million and 13.8%14.8% of net sales for the same period in 2018.2019. SG&A expenses as a percentage of sales increased 50140 basis points due principally to theprimarily as a result of trade show expenses and loss of leverage from lower sales volume.
Operating income was $11.6$8.6 million for the first quarter of 2020, resulting in an operating margin of 11.7%9.4%, for the third quarter of 2019, compared to operating income of $13.1$9.0 million and operating margin of 12.8%9.2% for the same period in 2018.2019. Operating margin decreased 110improved 20 basis points due principally to theprimarily as a result of lower material costs partially offset by loss of leverage from lower sales volume, partially offset by a favorable LIFO impact.volume.
The Company’s effective tax rate decreased to 17.9%Other income (expense), net was $1.7 million of expense for the thirdfirst quarter of 2019 from 21.6%2020 compared to income of $0.3 million for the third quartersame period in 2019. The increase to expense of 2018$2.0 million was due primarily to higher researchanon-cash pension settlement loss of $1.5 million and development tax credits, and a net tax benefit related to$0.5 million of foreign derived intangible income (“FDII”) and global intangiblelow-tax income (“GILTI”).exchange losses, which both occurred in the first quarter of 2020.
Net income was $9.8$5.5 million for the thirdfirst quarter of 20192020 compared to $10.7$7.2 million in the thirdfirst quarter of 2018,2019, and earnings per share were $0.37$0.21 and $0.41$0.28 for the respective periods. Earnings per share for the thirdfirst quarter of 20192020 included a favorable LIFO impact of $0.04 per share. Earnings per share for the third quarter of 2018 included an unfavorable LIFO impact of $0.04 per share.
Net sales for the first nine months of 2019 were $304.5 million compared to $311.3 million for the first nine months of 2018, a decrease of 2.2% or $6.8 million. Domestic sales increased 5.3% or $10.7 million while international sales decreased 16.0% or $17.5 million compared to the same period in 2018.
Gross profit was $77.3 million for the first nine months of 2019, resulting in gross margin of 25.4%, compared to gross profit of $83.4 million and gross margin of 26.8% for the same period in 2018. Gross margin decreased 140 basis points largely as a result of material cost increases due to inflation, tariffs and higher freight costs, and loss of leverage from lower sales volume. Partially offsetting these items was a favorable LIFO impact of 90 basis points compared to the same period in 2018.
SG&A expenses were $43.5 million and 14.3% of net sales for the first nine months of 2019 compared to $43.4 million and 14.0% of net sales for the same period in 2018. SG&A expenses as a percentage of sales increased 30 basis points primarily as a result of loss of leverage from lower sales volume.
Operating income was $33.8 million, resulting in an operating margin of 11.1% for the first nine months of 2019, compared to operating income of $40.0 million and operating margin of 12.8% for the same period in 2018. Operating margin decreased 170 basis points due principally to material cost increases and loss of leverage from lower sales volume, which were partially offset by selling price increases and a favorable LIFO impact compared to the same period in 2018.
The Company’s effective tax rate decreased to 20.5% for the first nine months of 2019 from 21.6% for the same period last year due primarily to higher research and development tax credits, and a net tax benefit related to FDII and GILTI.
Net income was $27.5 million for the first nine months of 2019 compared to $30.5 million in the first nine months of 2018, and earnings per share were $1.05 and $1.17 for the respective periods. The first nine months of 2018 earnings included an unfavorable LIFO impact of $0.09 per share and were also reduced bynon-cash pension settlement chargescharge of $0.08$0.04 per share.
The Company’s backlog of orders was $101.4$113.8 million at September 30, 2019March 31, 2020 compared to $122.4$120.8 million at September 30, 2018March 31, 2019 and $113.7$105.0 million at December 31, 2018. The backlog at September 30, 20192019. Incoming orders decreased 17.1%3.3% compared to September 30, 2018 driven by decreased incomingthe same period in 2019 while increasing 3.5% compared to the fourth quarter of 2019. Incoming orders in most ofduring the markets the Company serves, most notablyfirst quarter included an increase in the construction and petroleumfire protection market but were down to the prior year across most other markets.
On October 24, 2019,April 23, 2020, the Board of Directors authorized the payment of a quarterly dividend of $0.145 per share on the common stock of the Company, payable DecemberJune 10, 2019,2020, to shareholders of record as of NovemberMay 15, 2019. This cash dividend will represent a 7.4% increase over the regular dividend paid in the previous quarter.2020. This will mark the 279th281st consecutive quarterly dividend paid by The Gorman-Rupp Company and the 47th consecutive year of increased dividends paid to its shareholders.Company. The dividend yield on September 30, 2019March 31, 2020 was 1.6%1.9%.
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
Although material costs have generally stabilized since the fourth quarter of 2018, uncertainty remains around trade policy issues and potential new tariffs. Our volume of incoming orders continued to be negatively impacted by global economic uncertainty, but was relatively flat comparedWhile we are actively managing our response to the secondrecentCOVID-19 pandemic, its impact on our full-year 2020 results and beyond is uncertain. We serve as an essential business providing products that are critical to our customers. All of our manufacturing facilities continue to operate while closely following all national and local guidelines to provide for the health and safety of those working in these facilities. We expect our sales to remain challenging over the near-term as a result of uncertainty related toCOVID-19 and continued oil and gas market softness. Incoming orders during the first quarter of 2019. Global economic conditions affected incoming ordersincluded an increase in international markets, while adverse weather in many parts of the U.S. put pressure on construction projects andfire protection market but were down to the agriculture market. prior year across most other markets.
Our underlying fundamentals remain strong and we believe that we remain well positioned to weather theCOVID-19 pandemic and continue to drive long-term growth. 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. In addition, increased interestAn infrastructure bill including support for investment in water, wastewater and flood control infrastructure, coupled with the impact of lower taxes, couldwould be other positive factors over the next several years.beneficial.
Three Months Ended September 30, 2019March 31, 2020 vs. Three Months Ended September 30, 2018March 31, 2019
Net Sales
| Three Months Ended September 30, | ||||||||||||||||
| 2019 | 2018 | $ Change | % Change | |||||||||||||
Net Sales | $ | 99,298 | $ | 102,893 | $ | (3,595 | ) | (3.5 | )% | |||||||
| Three Months Ended March 31, | ||||||||||||||||
| 2020 | 2019 | $ Change | % Change | |||||||||||||
Net Sales | $ | 91,671 | $ | 96,859 | $ | (5,188 | ) | (5.4 | )% | |||||||
Net sales for the thirdfirst quarter of 20192020 were $99.3$91.7 million compared to net sales of $102.9$96.9 million for the thirdfirst quarter of 2018,2019, a decrease of 3.5%5.4% or $3.6$5.2 million. Domestic sales increased 6.4%decreased 3.4% or $4.2$2.3 million whileand international sales decreased 20.7%9.8% or $7.8$2.9 million compared to the same period in 2018.2019.
Sales in our water markets decreased 5.3%5.6% or $3.8 million in the thirdfirst quarter of 20192020 compared to the thirdfirst quarter of 2018.2019. Sales in the fire protection market increased $2.2 million driven primarily by increased domestic shipments and sales in the agriculture market increased $0.8 million. These increases were offset by decreased $4.1sales in the construction market of $6.1 million driven primarily by softness in international markets, and sales in the construction market decreased $3.0 million driven primarily by softness in the upstream oil and gas industry. These decreases were partially offset by increaseddrilling activity. Also, sales of repair parts decreased $0.5 million, and sales in the municipal market of $2.8 million due primarily to large volume custom pumps for flood control and water supply. In addition, sales in the agriculture and repair markets increased a total of $0.5decreased $0.2 million.
Sales in ournon-water markets increased 0.7%decreased 4.9% or $0.2$1.4 million in the thirdfirst quarter of 20192020 compared to the thirdfirst quarter of 2018.2019. Sales in the petroleumindustrial market increased $1.4 million driven primarily bymid-stream oil and gas customers.$0.1 million. This increase was partially offset by decreased sales in the industrialpetroleum market of $0.7$1.1 million duedriven primarily to softness in the upstreamby reduced demand from midstream oil and gas industry,customers and decreased sales in the OEM market of $0.5$0.4 million.
International sales were $29.8$26.3 million in the thirdfirst quarter of 20192020 compared to $37.6$29.2 million in the same period last year and represented 30%29% and 37%30% of total sales, forrespectively. The decrease in international sales was across most of the markets the Company respectively. International sales decreased $5.8 million in the fire protection market driven primarily by softness in the upstream oil and gas industry and $1.4 million in the construction market due primarily to strong fleet orders last year that did not recur this year.serves.
Cost of Products Sold and Gross Profit
| Three Months Ended September 30, | Three Months Ended March 31, | |||||||||||||||||||||||||||||||
| 2019 | 2018 | $ Change | % Change | 2020 | 2019 | $ Change | % Change | |||||||||||||||||||||||||
Cost of products sold | $ | 73,506 | $ | 75,566 | $ | (2,060 | ) | (2.7 | )% | $ | 68,223 | $ | 73,546 | $ | (5,323 | ) | (7.2 | )% | ||||||||||||||
% of Net sales | 74.0 | % | 73.4 | % | 74.4 | % | 75.9 | % | ||||||||||||||||||||||||
Gross Margin | 26.0 | % | 26.6 | % | 25.6 | % | 24.1 | % | ||||||||||||||||||||||||
Gross profit was $25.8$23.4 million for the thirdfirst quarter of 2019,2020, resulting in gross margin of 26.0%25.6%, compared to gross profit of $27.3$23.3 million and gross margin of 26.6%24.1% for the same period in 2018. The 602019. Gross margin improved 150 basis points decrease in gross margin was due principally to product mixlower material costs of 270 basis points as a result of the stabilization of material costs and selling price increases implemented in 2019 being fully realized. Partially offsetting these improvements was loss of leverage on fixed labor and overhead from lower sales volume compared to the thirdfirst quarter of 2018, partially offset by a favorable LIFO impact of 120 basis points. The LIFO impact on gross margin was positive in the third quarter of 2019 due to declining inventory levels as compared to amounts in inventory at December 31, 2018.
Selling, General and Administrative (SG&A) Expenses
| Three Months Ended September 30, | ||||||||||||||||
| 2019 | 2018 | $ Change | % Change | |||||||||||||
Selling, general and administrative expenses | $ | 14,154 | $ | 14,207 | $ | (53 | ) | (0.4 | )% | |||||||
% of Net sales | 14.3 | % | 13.8 | % | ||||||||||||
SG&A expenses were $14.2 million and 14.3% of net sales for the third quarter of 2019 compared to $14.2 million and 13.8% 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 September 30, | ||||||||||||||||
| 2019 | 2018 | $ Change | % Change | |||||||||||||
Operating income | $ | 11,638 | $ | 13,120 | $ | (1,482 | ) | (11.3 | )% | |||||||
% of Net sales | 11.7 | % | 12.8 | % | ||||||||||||
Operating income was $11.6 million, resulting in an operating margin of 11.7%, for the third quarter of 2019, compared to operating income of $13.1 million and operating margin of 12.8% for the same period in 2018. Operating margin decreased 110 basis points due principally to the loss of leverage from lower sales volume, partially offset by a favorable LIFO impact.
Net Income
| Three Months Ended September 30, | ||||||||||||||||
| 2019 | 2018 | $ Change | % Change | |||||||||||||
Income before income taxes | $ | 11,907 | $ | 13,652 | $ | (1,745 | ) | (12.8 | )% | |||||||
% of Net sales | 12.0 | % | 13.3 | % | ||||||||||||
Income taxes | $ | 2,132 | $ | 2,951 | $ | (819 | ) | (27.8 | )% | |||||||
Effective tax rate | 17.9 | % | 21.6 | % | ||||||||||||
Net income | $ | 9,775 | $ | 10,701 | $ | (926 | ) | (8.7 | )% | |||||||
% of Net sales | 9.8 | % | 10.4 | % | ||||||||||||
Earnings per share | $ | 0.37 | $ | 0.41 | $ | (0.04 | ) | (9.8 | )% | |||||||
The Company’s effective tax rate decreased to 17.9% for the third quarter of 2019 from 21.6% for the third quarter of 2018 due primarily to higher research and development tax credits, and a net tax benefit related to FDII and GILTI.
The decrease in net income in the third quarter of 2019 compared to the same period in 2018 of $0.9 million was due primarily to lower sales volume partially offset by a favorable LIFO impact. Net income in the third quarter of 2019 included a favorable LIFO impact of $0.9 million, net of income taxes. Conversely, net income in the third quarter of 2018 included an unfavorable LIFO impact of $1.1 million, net of income taxes.
Earnings per share for the third quarter of 2019 included a favorable LIFO impact of $0.04 per share. Conversely, earnings per share for the third quarter of 2018 included an unfavorable LIFO impact of $0.04 per share.
Nine Months Ended September 30, 2019 vs. Nine Months Ended September 30, 2018
Net Sales
| Nine Months Ended September 30, | ||||||||||||||||
| 2019 | 2018 | $ Change | % Change | |||||||||||||
Net Sales | $ | 304,487 | $ | 311,324 | $ | (6,837 | ) | (2.2)% | ||||||||
Net sales for the first nine months of 2019 were $304.5 million compared to $311.3 million for the first nine months of 2018, a decrease of 2.2% or $6.8 million. Domestic sales increased 5.3% or $10.7 million while international sales decreased 16.0% or $17.5 million compared to the same period in 2018.
Sales in our water markets decreased 2.1% or $4.5 million in the first nine months of 2019 compared to the first nine months of 2018. Sales in the municipal market increased $6.5 million due primarily to large volume custom pumps for flood control and water supply. This increase was offset by decreased sales in the fire protection market of $9.2 million driven primarily by softness in international markets and decreased sales in the agriculture market of $1.8 million due primarily to adverse weather conditions.
Sales in ournon-water markets decreased 2.4% or $2.3 million in the first nine months of 2019 compared to the first nine months of 2018. Sales in the petroleum market increased $2.3 million driven primarily bymid-stream oil and gas customers. This increase was offset by decreased sales in the industrial market of $3.9 million due primarily to softness in the upstream oil and gas market and decreased sales in the OEM market of $0.7 million.
International sales were $92.5 million in the first nine months of 2019 compared to $110.1 million in the same period last year and represented 30% and 35% of total sales for the Company, respectively. International sales decreased most notably in the fire protection, construction and municipal markets.
Cost of Products Sold and Gross Profit
| Nine Months Ended September 30, | ||||||||||||||||
| 2019 | 2018 | $ Change | % Change | |||||||||||||
Cost of products sold | $ | 227,190 | $ | 227,926 | $ | (736 | ) | (0.3 | )% | |||||||
% of Net sales | 74.6 | % | 73.2 | % | ||||||||||||
Gross Margin | 25.4 | % | 26.8 | % | ||||||||||||
Gross profit was $77.3 million for the first nine months of 2019, resulting in gross margin of 25.4%, compared to gross profit of $83.4 million and gross margin of 26.8% for the same period in 2018. Gross margin decreased 140 basis points largely as a result of material cost increases due to inflation, tariffs and higher freight costs, and loss of leverage from lower sales volume. Partially offsetting these items was a favorable LIFO impact of 90 basis points compared to the same period in 2018.2019.
Selling, General and Administrative (SG&A) Expenses
| Nine Months Ended September 30, | Three Months Ended March 31, | |||||||||||||||||||||||||||||||
| 2019 | 2018 | $ Change | % Change | 2020 | 2019 | $ Change | % Change | |||||||||||||||||||||||||
Selling, general and administrative expenses | $ | 43,505 | $ | 43,435 | $ | 70 | 0.2 | % | $ | 14,871 | $ | 14,363 | $ | 508 | 3.5 | % | ||||||||||||||||
% of Net sales | 14.3 | % | 14.0 | % | 16.2 | % | 14.8 | % | ||||||||||||||||||||||||
SG&A expenses were $43.5$14.9 million and 14.3%16.2% of net sales for the first nine monthsquarter of 20192020 compared to $43.4$14.4 million and 14.0%14.8% of net sales for the same period in 2018.2019. SG&A expenses as a percentage of sales increased 30140 basis points primarily as a result of trade show expenses and loss of leverage from lower sales volume.
Operating Income
| Nine Months Ended September 30, | Three Months Ended March 31, | |||||||||||||||||||||||||||||||
| 2019 | 2018 | $ Change | % Change | 2020 | 2019 | $ Change | % Change | |||||||||||||||||||||||||
Operating income | $ | 33,792 | $ | 39,963 | $ | (6,171 | ) | (15.4 | )% | $ | 8,577 | $ | 8,950 | $ | (373 | ) | (4.2 | )% | ||||||||||||||
% of Net sales | 11.1 | % | 12.8 | % | 9.4 | % | 9.2 | % | ||||||||||||||||||||||||
Operating income was $33.8$8.6 million for the first quarter of 2020, resulting in an operating margin of 11.1% for the first nine months of 2019,9.4%, compared to operating income of $40.0$9.0 million and operating margin of 12.8%9.2% for the same period in 2018.2019. Operating margin decreased 170improved 20 basis points due principally toprimarily as a result of lower material cost increases andcosts partially offset by loss of leverage from lower sales volume, which were partially offset by selling price increases and a favorable LIFO impact compared to the same period in 2018.volume.
Net Income
| Nine Months Ended September 30, | Three Months Ended March 31, | |||||||||||||||||||||||||||||||
| 2019 | 2018 | $ Change | % Change | 2020 | 2019 | $ Change | % Change | |||||||||||||||||||||||||
Income before income taxes | $ | 34,584 | $ | 38,894 | $ | (4,310 | ) | (11.1 | )% | $ | 6,890 | $ | 9,242 | $ | (2,352) | (25.4 | )% | |||||||||||||||
% of Net sales | 11.4 | % | 12.5 | % | 7.5 | % | 9.5 | % | ||||||||||||||||||||||||
Income taxes | $ | 7,107 | $ | 8,403 | $ | (1,296 | ) | (15.4 | )% | $ | 1,404 | $ | 2,020 | $ | (616 | ) | (30.5 | )% | ||||||||||||||
Effective tax rate | 20.5 | % | 21.6 | % | 20.4 | % | 21.9 | % | ||||||||||||||||||||||||
Net income | $ | 27,477 | $ | 30,491 | $ | (3,014 | ) | (9.9 | )% | $ | 5,486 | $ | 7,222 | $ | (1,736 | ) | (24.0 | )% | ||||||||||||||
% of Net sales | 9.0 | % | 9.8 | % | 6.0 | % | 7.5 | % | ||||||||||||||||||||||||
Earnings per share | $ | 1.05 | $ | 1.17 | $ | (0.12 | ) | (10.3 | )% | $ | 0.21 | $ | 0.28 | $ | (0.07 | ) | (25.0 | )% | ||||||||||||||
The Company’s effective tax rate decreased to 20.5%was 20.4% for the first nine monthsquarter of 2020 compared to 21.9% for the first quarter of 2019 from 21.6% for the same period last yearprimarily due primarily to higher research and development tax credits, and a net tax benefit related to FDII and GILTI.favorable impact of discrete items.
The decrease in net income in the first nine monthsquarter of 20192020 compared to the same period in 20182019 of $4.3$1.7 million was due primarily to material cost increases resulting from inflation, tariffs and higher freight costs and lossincluded anon-cash pension settlement charge of leverage from lower sales volume, which were partially offset by selling price increases and a favorable LIFO impact compared to the same period in 2018. Net income in the first nine months of 2018 included an unfavorable LIFO impact of $2.5$1.1 million, net of income taxes andnon-cash pension settlement charges foreign exchange losses of $2.1$0.4 million, net of income taxes.
Earnings per share for the first nine months of 2018 included an unfavorable LIFO impact of $0.09 per share and were also reduced bynon-cash pension settlement charges of $0.08 per share.
Liquidity and Capital Resources
Cash and cash equivalents totaled $85.7$82.4 million and there was no outstanding bank debt at September 30, 2019.March 31, 2020. The Company had $24.5$23.7 million available in bank lines of credit after deducting $6.5$7.3 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 September 30, 2019March 31, 2020 and December 31, 2018.2019.
Free cash flow, anon-GAAP 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 investors with an important perspective on cash available for investments, acquisitions and working capital requirements.
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, | Three Months Ended March 31, | |||||||||||||||
| 2019 | 2018 | 2020 | 2019 | |||||||||||||
Non-GAAP adjusted earnings before interest, taxes, depreciation and amortization | $ | 45,147 | $ | 52,514 | $ | 11,550 | $ | 12,808 | ||||||||
Less capital expenditures | (8,027 | ) | (7,647 | ) | (1,667 | ) | (2,124 | ) | ||||||||
Less cash dividends | (10,581 | ) | (9,791 | ) | (3,780 | ) | (3,526 | ) | ||||||||
|
|
|
| |||||||||||||
Non-GAAP free cash flow | $ | 26,539 | $ | 35,076 | $ | 6,103 | $ | 7,158 | ||||||||
|
|
|
| |||||||||||||
Financial Cash Flow
| Nine Months Ended September 30, | Three Months Ended March 31, | |||||||||||||||
| 2019 | 2018 | 2020 | 2019 | |||||||||||||
Beginning of period cash and cash equivalents | $ | 46,458 | $ | 79,680 | $ | 80,555 | $ | 46,458 | ||||||||
Net cash provided by operating activities | 58,347 | 36,545 | 8,432 | 9,659 | ||||||||||||
Net cash used for investing activities | (7,985 | ) | (3,888 | ) | (1,667 | ) | (2,124 | ) | ||||||||
Net cash used for financing activities | (11,063 | ) | (10,250 | ) | (4,425 | ) | (3,943 | ) | ||||||||
Effect of exchange rate changes on cash | (55 | ) | (706 | ) | (459 | ) | 127 | |||||||||
|
|
|
| |||||||||||||
Net increase in cash and cash equivalents | 39,244 | 21,701 | 1,881 | 3,719 | ||||||||||||
|
|
|
| |||||||||||||
End of period cash and cash equivalents | $ | 85,702 | $ | 101,381 | $ | 82,436 | $ | 50,177 | ||||||||
|
|
|
| |||||||||||||
The increasedecrease in cash provided by operating activities in the first ninethree months of 20192020 compared to the same period last year was primarily due to lowerincreased inventories driven by a planned inventory reduction and a decrease in accounts receivable driven by lower sales volume. In addition, prepaid income taxes decreased and the Company has not made any pension contributions in the current year. These positive effects on cash flow wereperiod, partially offset by a decreasechanges in benefit obligations and commissions payable driven by lower sales volume, and valuation adjustments to prepaid pension assets.payable.
During the first ninethree months of 2020 and 2019, investing activities primarily consisted of capital expenditures of $8.0 millionprimarily for machinery and equipment buildingsof $1.7 million and land. During the first nine months of 2018, investing activities of $3.9$2.1 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.respectively.
Net cash used for financing activities for the first ninethree months of 20192020 and 20182019 primarily consisted of dividend payments of $10.6$3.8 million and $9.8$3.5 million, respectively.
As we cannot predict the duration or scope of theCOVID-19 pandemic and its impact on our customers and suppliers, the negative financial impact to our results cannot be reasonably estimated, but could be material. We are actively managing the business to maintain cash flow and we have significant liquidity. We believe that these factors will allow us to meet our anticipated funding requirements.
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, 20182019 contained in our Annual Report on Form10-K for the year ended December 31, 2018.2019. 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 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.
Cautionary 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;environment, including the duration and scope of theCOVID-19 pandemic, the impact of the pandemic and actions taken in response to the pandemic; (2) highly competitive markets; (3) availability and costs of raw materials, and our ability to mitigate cost increases through selling price adjustments;materials; (4) loss of key management;personnel; (5) cyber security threats; (6) intellectual property security; (7) acquisition performance and integration; (7)(8) compliance with, and costs related to, a variety of import and export laws and regulations; (8)(9) environmental compliance costs and liabilities; (9)(10) exposure to fluctuations in foreign currency exchange rates; (10)(11) conditions in foreign countries in which The Gorman-Rupp Company conducts business; (11)(12) changes in our tax rates and exposure to additional income tax liabilities; (12)(13) impairment in the value of intangible assets, including goodwill; (13)(14) defined benefit pension plan settlement expense; (14)(15) family ownership of common equity; and (15)(16) 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. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
The Company is subject to market risk associated principally with fluctuations in foreign currency exchange rates. The Company’s foreign currency exchange rate risk is limited primarily to the Euro, Canadian Dollar, South African Rand and 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 months ofperiods ending March 31, 2020 and 2019 and the first nine months of 2018 were negligible$(0.5) million and $(0.6) million,$45,000, respectively, and are reported within Other (expense) 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 related to foreign currency transactions determined to be long term in nature.
| ITEM 4. | CONTROLS AND PROCEDURES |
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, 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, 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 September 30, 2019.March 31, 2020.
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.
| 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, 2018.2019.
| ITEM 1A. | RISK FACTORS |
TheCOVID-19 pandemic has disrupted our operations and could have a material adverse effect on our business.
Our business could be materially and adversely affected by the outbreak of a widespread health epidemic. The present coronavirus (orCOVID-19) pandemic has disrupted our operations and will affect our business, including as government authorities impose mandatory closures, work-from-home orders and social distancing protocols, and seek voluntary facility closures or impose other restrictions that could materially adversely affect our ability to adequately staff and maintain our operations. Specifically, we have experienced one temporary facility closure in South Africa, and may experience in the future additional temporary facility closures in response to government mandates in certain jurisdictions in which we operate and in response to positive diagnoses forCOVID-19 in certain facilities for the safety of our associates. TheCOVID-19 outbreak could also disrupt our supply chain and materially adversely impact our ability to secure supplies for our facilities and to provide personal protective equipment for our employees, which could materially adversely affect our operations. There are nomay also be long-term effects on our customers in and the economies of affected countries. Even if a virus or other illness does not spread significantly, the perceived risk of infection or health risk may materially adversely affect our business. Any of the foregoing within the countries in which we or our customers and suppliers operate would severely disrupt our operations and could have a material adverse effect on our business, results of operations, cash flows and financial condition. In addition, future changes fromin the Company’s cost of capital, expected cash flows, or other factors as a result of the above may cause the Company’s goodwill to be impaired, resulting in anon-cash charge against results of operations to write down goodwill for the amount of the impairment. As we cannot predict the duration or scope of theCOVID-19 pandemic, the negative financial impact to our results cannot be reasonably estimated, but could be material.
In addition to the other information set forth in this report, you should carefully consider the other risk factors previously reporteddisclosed in Item 1A of the Company’s Annual Report on Form10-K for the fiscal year ended December 31, 2018.2019.
| 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 | |
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 | ||||
(Principal Financial Officer) | ||||
2419