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Gorman-Rupp (GRC)

Filed: 29 Oct 19, 10:14am
Table of Contents

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, 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
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, there were 26,133,393 common shares, without par value, of The Gorman-Rupp Company outstanding.


Table of Contents


Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1—FINANCIAL STATEMENTS (UNAUDITED)

THE GORMAN-RUPP COMPANY

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 

(Dollars in thousands, except per share amounts)

   2019   2018    2019   2018 
  

 

 

  

 

 

   

 

 

  

 

 

 

Net sales

  $99,298  $102,893   $304,487  $311,324 

Cost of products sold

   73,506   75,566    227,190   227,926 
  

 

 

  

 

 

   

 

 

  

 

 

 

Gross profit

   25,792   27,327    77,297   83,398 

Selling, general and administrative expenses

   14,154   14,207    43,505   43,435 
  

 

 

  

 

 

   

 

 

  

 

 

 

Operating income

   11,638   13,120    33,792   39,963 

Other income (expense), net

   269   532    792   (1,069
  

 

 

  

 

 

   

 

 

  

 

 

 

Income before income taxes

   11,907   13,652    34,584   38,894 

Income taxes

   2,132   2,951    7,107   8,403 
  

 

 

  

 

 

   

 

 

  

 

 

 

Net income

  $9,775  $10,701   $27,477  $30,491 
  

 

 

  

 

 

   

 

 

  

 

 

 

Earnings per share

  $0.37  $0.41   $1.05  $1.17 

Cash dividends per share

  $0.135  $0.125   $0.405  $0.375 

Average number of shares outstanding

   26,133,393   26,117,045    26,125,553   26,110,484 
See notes to consolidated financial statements (unaudited).

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
(Dollars in thousands)  2019  2018   2019  2018 

Net income

  $9,775  $10,701   $27,477  $30,491 

Other comprehensive (loss) income, net of tax:

      

Cumulative translation adjustments

   (1,611  118    (1,180  (1,549

Pension and postretirement medical liability adjustments

   340   308    1,034   2,739 
  

 

 

  

 

 

   

 

 

  

 

 

 

Other comprehensive (loss) income

   (1,271  426    (146  1,190 
  

 

 

  

 

 

   

 

 

  

 

 

 

Comprehensive income

  $8,504  $11,127   $27,331  $31,681 
  

 

 

  

 

 

   

 

 

  

 

 

 

See notes to consolidated financial statements (unaudited).

 

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Table of Contents

THE GORMAN-RUPP COMPANY

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).

 

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THE GORMAN-RUPP COMPANY

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).

 

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THE GORMAN-RUPP COMPANY

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).

 

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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, 2019 are not necessarily indicative of results that may be expected for the year ending December 31, 2019. 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, 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.

Recently Adopted Accounting Standards

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 remains similar topre-existing U.S. GAAP. Subsequent accounting standards updates have been issued, which amend and/or clarify the application of ASU2016-02. The Company adopted Topic 842 effective January 1, 2019. See Note 9, Leases for further details.

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,
 
   2019   2018   2019   2018 

Pumps and pump systems

  $86,114   $89,835   $260,913   $268,485 

Repair parts for pumps and pump systems and other

   13,184    13,058    43,574    42,839 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net sales

  $99,298   $102,893   $304,487   $311,324 
  

 

 

   

 

 

   

 

 

   

 

 

 
   Geographic Location 
   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2019   2018   2019   2018 

United States

  $69,491   $65,285   $211,976   $201,237 

Foreign countries

   29,807    37,608    92,511    110,087 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net sales

  $99,298   $102,893   $304,487   $311,324 
  

 

 

   

 

 

   

 

 

   

 

 

 

International sales represented approximately 30% and 37% of total net sales for the third quarter of 2019 and 2018, respectively, and were made to customers in many different countries around the world.

 

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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 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, the Company had $101.4 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.

 

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The Company’s contract assets and liabilities as of September 30, 2019 and December 31, 2018, respectively, were as follows:

 

   September 30,
2019
   December 31,
2018
 

Contract assets

  $1,290   $1,953 

Contract liabilities

  $6,440   $5,232 

Revenue recognized for the nine months ended September 30, 2019 and 2018 that was included in the contract liabilities balance at the beginning of the period was $4.4 million and $3.4 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 million and $63.7 million at September 30, 2019 and December 31, 2018, respectively. Allowances for excess and obsolete inventory totaled $5.9 million and $5.3 million at September 30, 2019 and December 31, 2018, 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
 

Raw materials andin-process

  $14,809   $21,773 

Finished parts

   48,384    54,209 

Finished products

   10,406    11,405 
  

 

 

   

 

 

 

Total net inventories

  $73,599   $87,387 
  

 

 

   

 

 

 

NOTE 5 - PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment, net consist of the following:

 

   September 30,
2019
   December 31,
2018
 

Land

  $4,936   $3,869 

Buildings

   109,143    106,940 

Machinery and equipment

   181,417    177,668 
  

 

 

   

 

 

 
   295,496    288,477 

Less accumulated depreciation

   (184,143   (174,984
  

 

 

   

 

 

 

Property, plant and equipment, net

  $111,353   $113,493 
  

 

 

   

 

 

 

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 
  

 

 

   

 

 

 

 

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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 
   Three Months Ended
September 30,
   Three Months Ended
September 30,
 
   2019   2018   2019  2018 

Service cost

  $551   $562   $271  $194 

Interest cost

   614    644    235   141 

Expected return on plan assets

   (890   (1,073   —     —   

Amortization of prior service cost

   —     —      (282  (283

Recognized actuarial loss (gain)

   431    388    7   (103

Settlement loss

     120    —     —   
  

 

 

   

 

 

   

 

 

  

 

 

 

Net periodic benefit cost (gain) (a)

  $706   $641   $231  $(51
  

 

 

   

 

 

   

 

 

  

 

 

 
   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.

 

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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,
 
   2019     2018     2019     2018 

Pension and other postretirement benefits:

              

Recognized actuarial loss (a)

  $438     $285     $1,315     $896 

Settlement loss (b)

   —        120      —        2,736 
  

 

 

     

 

 

     

 

 

     

 

 

 

Total before income tax

  $438     $405     $1,315     $3,632 

Income tax

   (98     (97     (281     (893
  

 

 

     

 

 

     

 

 

     

 

 

 

Net of income tax

  $340     $308     $1,034     $2,739 
  

 

 

     

 

 

     

 

 

     

 

 

 

 

(a)

The recognized actuarial loss is included in Other income (expense), net in the Consolidated Statements of Income.

(b)

The settlement loss is included in Other income (expense), net in the Consolidated Statements of Income.

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.

 

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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
     

Weighted average remaining lease term (years):

    

Operating leases

   2.9   

Finance leases

   4.5   

Weighted average discount rate:

    

Operating leases

   3.25  

Finance leases

   3.25  

 

   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 
  

 

 

     

 

 

     

 

 

 

 

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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.

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. 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.

 

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   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2019   2018   2019   2018 

Adjusted earnings per share:

        

Reported earnings per share – GAAP basis

  $0.37   $0.41   $1.05   $1.17 

Plus pension settlement charge per share

   —      —      —      0.08 
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-GAAP adjusted earnings per share

  $0.37   $0.41   $1.05   $1.25 
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted earnings before interest, taxes, depreciation and amortization:

        

Reported net income–GAAP basis

  $9,775   $10,701   $27,477   $30,491 

Plus income taxes

   2,132    2,951    7,107    8,403 

Plus depreciation and amortization

   3,468    3,674    10,563    10,884 
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-GAAP earnings before interest, taxes, depreciation and amortization

   15,375    17,326    45,147    49,778 

Plus pension settlement charge

   —      120    —      2,736 
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-GAAP adjusted earnings before interest, taxes, depreciation and amortization

  $15,375   $17,446   $45,147   $52,514 
  

 

 

   

 

 

   

 

 

   

 

 

 

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 past 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 for future acquisition and product development opportunities. The Company had no bank debt as of September 30, 2019. The Company’s cash position increased $39.2 million during the first nine months of 2019 to $85.7 million at September 30, 2019 and the Company generated $45.1 million in adjusted earnings before interest, taxes, depreciation and amortization during the same period.

Capital expenditures for the first nine months of 2019 were $8.0 million and consisted primarily of machinery and equipment. Capital expenditures for the full-year 2019 are presently planned to be in the range of$15-$17 million primarily for building expansion and machinery and equipment purchases, and are expected to be financed through internally-generated funds.

Net sales for the third quarter of 2019 were $99.3 million compared to net sales of $102.9 million for the third quarter of 2018, a decrease of 3.5% or $3.6 million. Domestic sales increased 6.4% or $4.2 million while international sales decreased 20.7% or $7.8 million compared to the same period in 2018.

Gross profit was $25.8 million for the third quarter of 2019, resulting in gross margin of 26.0%, compared to gross profit of $27.3 million and gross margin of 26.6% for the same period in 2018. The 60 basis points decrease in gross margin was due principally to product mix and loss of leverage from lower sales volume compared to the third 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.

 

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Selling, general and administrative (“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 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.

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 foreign derived intangible income (“FDII”) and global intangiblelow-tax income (“GILTI”).

Net income was $9.8 million for the third quarter of 2019 compared to $10.7 million in the third quarter of 2018, and earnings per share were $0.37 and $0.41 for the respective periods. Earnings per share for the third quarter of 2019 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 charges of $0.08 per share.

The Company’s backlog of orders was $101.4 million at September 30, 2019 compared to $122.4 million at September 30, 2018 and $113.7 million at December 31, 2018. The backlog at September 30, 2019 decreased 17.1% compared to September 30, 2018 driven by decreased incoming orders in most of the markets the Company serves, most notably in the construction and petroleum markets.

On October 24, 2019, the Board of Directors authorized the payment of a quarterly dividend of $0.145 per share on the common stock of the Company, payable December 10, 2019, to shareholders of record as of November 15, 2019. This cash dividend will represent a 7.4% increase over the regular dividend paid in the previous quarter. This will mark the 279th consecutive quarterly dividend paid by The Gorman-Rupp Company and the 47th consecutive year of increased dividends paid to its shareholders. The dividend yield on September 30, 2019 was 1.6%.

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.

 

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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 compared to the second quarter of 2019. Global economic conditions affected incoming orders in international markets, while adverse weather in many parts of the U.S. put pressure on construction projects and the agriculture market. Our underlying fundamentals remain strong and we believe that we remain well positioned 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 interest in flood control infrastructure, coupled with the impact of lower taxes, could be other positive factors over the next several years.

Three Months Ended September 30, 2019 vs. Three Months Ended September 30, 2018

Net Sales

 

   Three Months Ended
September 30,
     
   2019   2018   $ Change   % Change 

Net Sales

  $99,298   $102,893   $(3,595   (3.5)% 

Net sales for the third quarter of 2019 were $99.3 million compared to net sales of $102.9 million for the third quarter of 2018, a decrease of 3.5% or $3.6 million. Domestic sales increased 6.4% or $4.2 million while international sales decreased 20.7% or $7.8 million compared to the same period in 2018.

Sales in our water markets decreased 5.3% or $3.8 million in the third quarter of 2019 compared to the third quarter of 2018. Sales in the fire protection market decreased $4.1 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 increased 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 $0.5 million.

Sales in ournon-water markets increased 0.7% or $0.2 million in the third quarter of 2019 compared to the third quarter of 2018. Sales in the petroleum market increased $1.4 million driven primarily bymid-stream oil and gas customers. This increase was partially offset by decreased sales in the industrial market of $0.7 million due primarily to softness in the upstream oil and gas industry, and decreased sales in the OEM market of $0.5 million.

International sales were $29.8 million in the third quarter of 2019 compared to $37.6 million in the same period last year and represented 30% and 37% of total sales for 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.

Cost of Products Sold and Gross Profit

 

   Three Months Ended
September 30,
    
   2019  2018  $ Change  % Change 

Cost of products sold

  $73,506  $  75,566  $(2,060  (2.7)% 

% of Net sales

   74.0  73.4  

Gross Margin

   26.0  26.6  

Gross profit was $25.8 million for the third quarter of 2019, resulting in gross margin of 26.0%, compared to gross profit of $27.3 million and gross margin of 26.6% for the same period in 2018. The 60 basis points decrease in gross margin was due principally to product mix and loss of leverage from lower sales volume compared to the third 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.

 

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Table of Contents

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.

 

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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.

Selling, General and Administrative (SG&A) Expenses

 

   Nine Months Ended
September 30,
    
   2019   2018  $ Change   % Change 

Selling, general and administrative expenses

  $  43,505   $  43,435  $    70      0.2

% of Net sales

   14.3   14.0   

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.

 

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Table of Contents

Operating Income

 

   Nine Months Ended
September 30,
    
   2019  2018  $ Change   % Change 

Operating income

  $33,792  $39,963  $(6,171   (15.4)% 

% of Net sales

   11.1  12.8   

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.

Net Income

 

   Nine Months Ended
September 30,
        
   2019  2018  $ Change   % Change 

Income before income taxes

  $34,584  $38,894   $(4,310   (11.1)% 

% of Net sales

   11.4  12.5   

Income taxes

  $7,107  $8,403  $(1,296   (15.4)% 

Effective tax rate

   20.5  21.6   

Net income

  $27,477  $30,491  $(3,014   (9.9)% 

% of Net sales

   9.0  9.8   

Earnings per share

  $1.05  $1.17  $(0.12   (10.3)% 

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.

The decrease in net income in the first nine months of 2019 compared to the same period in 2018 of $4.3 million was due primarily to material cost increases resulting from inflation, tariffs and higher freight costs 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. Net income in the first nine months of 2018 included an unfavorable LIFO impact of $2.5 million, net of income taxes, andnon-cash pension settlement charges of $2.1 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 million and there was no outstanding bank debt at September 30, 2019. The Company had $24.5 million available in bank lines of credit after deducting $6.5 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, 2019 and December 31, 2018.

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.

 

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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,
 
   2019   2018 

Non-GAAP adjusted earnings before interest, taxes, depreciation and amortization

  $45,147   $52,514 

Less capital expenditures

   (8,027   (7,647

Less cash dividends

   (10,581   (9,791
  

 

 

   

 

 

 

Non-GAAP free cash flow

  $26,539   $35,076 
  

 

 

   

 

 

 

Financial Cash Flow

 

   Nine Months Ended
September 30,
 
   2019   2018 

Beginning of period cash and cash equivalents

  $46,458   $79,680 

Net cash provided by operating activities

   58,347    36,545 

Net cash used for investing activities

   (7,985   (3,888

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 
  

 

 

   

 

 

 

End of period cash and cash equivalents

  $85,702   $101,381 
  

 

 

   

 

 

 

The increase in cash provided by operating activities in the first nine months of 2019 compared to the same period last year was primarily due to lower 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 were offset by a decrease in commissions payable driven by lower sales volume, and valuation adjustments to prepaid pension assets.

During the first nine months of 2019, investing activities primarily consisted of capital expenditures of $8.0 million for machinery and equipment, buildings and land. During the first nine months of 2018, 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.

Net cash used for financing activities for the first nine months of 2019 and 2018 primarily consisted of dividend payments of $10.6 million and $9.8 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, 2018 contained in our Annual Report on Form10-K for the year ended December 31, 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 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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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; (2) highly competitive markets; (3) availability and costs of raw 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 The 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.

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 of 2019 and the first nine months of 2018 were negligible million and $(0.6) million, respectively, and are reported within Other 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.

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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PART II. OTHER INFORMATION

 

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.

 

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, 2018.

 

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ITEM 6.

EXHIBITS

 

Exhibit 31.1  

Certification of Jeffrey S. Gorman, Chairman, President and Chief Executive Officer, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 31.2  

Certification of James C. Kerr, Vice President and Chief Financial Officer, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 32  

Certification pursuant to 18 U.S.C Section 1350, as adopted Pursuant to Section  906 of The Sarbanes-Oxley Act of 2002.

Exhibit 101  

Financial statements from the Quarterly Report on Form10-Q of The Gorman-Rupp Company for the quarter ended September 30, 2019, formatted in eXtensible Business Reporting Language (XBRL): (i) the Consolidated Statements of Income, (ii) the Consolidated Statements of Comprehensive Income, (iii) the Consolidated Balance Sheets, (iv) the Consolidated Statements of Cash Flows, (v) the Consolidated Statements of Equity, and (vi) the Notes to Consolidated Financial Statements.

 

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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: October 29, 2019

  
 

By:

 

/s/ James C. Kerr

  

James C. Kerr

  

Vice President and Chief Financial Officer

  

(Principal Financial Officer)

 

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