Company Quick10K Filing
Quick10K
Gorman Rupp
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$32.91 26 $860
10-Q 2019-06-30 Quarter: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-07-26 Earnings, Exhibits
8-K 2019-04-25 Earnings, Exhibits
8-K 2019-04-25 Officers, Shareholder Vote, Regulation FD, Exhibits
8-K 2019-02-08 Earnings, Exhibits
8-K 2019-01-23 Officers, Regulation FD, Exhibits
8-K 2019-01-23 Officers, Regulation FD, Exhibits
8-K 2018-10-26 Earnings, Exhibits
8-K 2018-07-27 Earnings, Exhibits
8-K 2018-02-09 Earnings, Exhibits
BP BP 141,270
NVDA Nvidia 103,560
MRNA Moderna 7,650
GSKY Greensky 2,360
CNDT Conduent 1,620
KEN Kenon Holdings 1,050
DRD Drdgold 131
ACY Aerocentury 18
EPIX ESSA Pharma 17
MTGA Mohegan Tribal Gaming Authority 0
GRC 2019-06-30
Part I. Financial Information
Item 1-Financial Statements (Unaudited)
Note 1 - Basis of Presentation of Financial Statements
Note 2 - Recently Issued Accounting Standards
Note 3 - Revenue
Note 4 - Inventories
Note 5 - Property, Plant and Equipment
Note 6 - Product Warranties
Note 7 - Pension and Other Postretirement Benefits
Note 8 - Accumulated Other Comprehensive Income (Loss)
Note 9 - Leases
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 6. Exhibits
EX-31.1 d783361dex311.htm
EX-31.2 d783361dex312.htm
EX-32 d783361dex32.htm

Gorman Rupp Earnings 2019-06-30

GRC 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 d783361d10q.htm FORM 10-Q Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 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 Number 1-6747

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 Regulation S-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, a non-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 Rule 12b-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 Rule 12b-2 of the Exchange Act).    Yes  ☐        No  ☒

On July 26, 2019, there were 26,133,393 common shares, without par value, of The Gorman-Rupp Company outstanding.


The Gorman-Rupp Company

Three and six months ended June 30, 2019 and 2018

 

PART I. FINANCIAL INFORMATION

  

Item 1.

   Financial Statements (Unaudited)   
   Consolidated Statements of Income
- Three months ended June 30, 2019 and 2018
- Six months ended June 30, 2019 and 2018
     3  
   Consolidated Statements of Comprehensive Income
- Three months ended June 30, 2019 and 2018
- Six months ended June 30, 2019 and 2018
     3  
   Consolidated Balance Sheets
- June 30, 2019 and December 31, 2018
     4  
   Consolidated Statements of Cash Flows
- Six months ended June 30, 2019 and 2018
     5  
   Consolidated Statements of Equity
- Three months ended June 30, 2019 and 2018
- Six months ended June 30, 2019 and 2018
     6  
  

Notes to Consolidated Financial Statements (Unaudited)

     7  

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      13  

Item 3.

   Quantitative and Qualitative Disclosures about Market Risk      21  

Item 4.

   Controls and Procedures      21  

PART II. OTHER INFORMATION

  

Item 1.

   Legal Proceedings      22  

Item 1A.

   Risk Factors      22  

Item 6.

   Exhibits      23  

EX-31.1

   Section 302 Principal Executive Officer (PEO) Certification      25  

EX-31.2

   Section 302 Principal Financial Officer (PFO) Certification      26  

EX-32

   Section 1350 Certifications      27  

 

2


PART I. FINANCIAL INFORMATION

ITEM 1—FINANCIAL STATEMENTS (UNAUDITED)

THE GORMAN-RUPP COMPANY

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 

(Dollars in thousands, except per share amounts)

     2019        2018       2019        2018  
  

 

 

    

 

 

   

 

 

    

 

 

 

Net sales

   $ 108,330      $ 111,827     $ 205,189      $ 208,431  

Cost of products sold

     80,138        81,962       153,684        152,360  
  

 

 

    

 

 

   

 

 

    

 

 

 

Gross profit

     28,192        29,865       51,505        56,071  

Selling, general and administrative expenses

     14,988        14,872       29,351        29,228  
  

 

 

    

 

 

   

 

 

    

 

 

 

Operating income

     13,204        14,993       22,154        26,843  

Other income (expense), net

     231        (2,407     523        (1,601
  

 

 

    

 

 

   

 

 

    

 

 

 

Income before income taxes

     13,435        12,586       22,677        25,242  

Income taxes

     2,955        2,413       4,975        5,452  
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income

   $ 10,480      $ 10,173     $ 17,702      $ 19,790  
  

 

 

    

 

 

   

 

 

    

 

 

 

Earnings per share

   $ 0.40      $ 0.39     $ 0.68      $ 0.76  

Cash dividends per share

   $ 0.135      $ 0.125     $ 0.270      $ 0.250  

Average number of shares outstanding

     26,124,216        26,107,670       26,121,568        26,107,149  

See notes to consolidated financial statements (unaudited).

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 

(Dollars in thousands)

     2019        2018       2019        2018  
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income

   $ 10,480      $ 10,173     $ 17,702      $ 19,790  

Other comprehensive income, net of tax:

          

Cumulative translation adjustments

     583        (1,855     431        (1,666

Pension and postretirement medical liability adjustments

     378        1,921       694        2,431  
  

 

 

    

 

 

   

 

 

    

 

 

 

Other comprehensive income

     961        66       1,125        765  
  

 

 

    

 

 

   

 

 

    

 

 

 

Comprehensive income

   $ 11,441      $ 10,239     $ 18,827      $ 20,555  
  

 

 

    

 

 

   

 

 

    

 

 

 

See notes to consolidated financial statements (unaudited).

 

3


THE GORMAN-RUPP COMPANY

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

 

(Dollars in thousands)    June 30,
2019
    December 31,
2018
 
Assets     

Current assets:

    

Cash and cash equivalents

   $ 62,165     $ 46,458  

Accounts receivable, net

     75,476       67,714  

Inventories, net

     78,809       87,387  

Prepaid and other

     4,411       7,127  
  

 

 

   

 

 

 

Total current assets

     220,861       208,686  

Property, plant and equipment, net

     110,526       113,493  

Other assets

     9,307       5,101  

Prepaid pension assets

     4,269       4,817  

Goodwill and other intangible assets, net

     35,633       36,185  
  

 

 

   

 

 

 

Total assets

   $ 380,596     $ $368,282  
  

 

 

   

 

 

 
Liabilities and equity     

Current liabilities:

    

Accounts payable

   $ 14,306     $ 16,678  

Payroll and employee related liabilities

     13,313       12,651  

Commissions payable

     8,370       9,222  

Deferred revenue and customer deposits

     7,260       5,232  

Accrued expenses

     5,845       4,682  
  

 

 

   

 

 

 

Total current liabilities

     49,094       48,465  

Postretirement benefits

     21,224       21,853  

Other long-term liabilities

     4,929       4,832  
  

 

 

   

 

 

 

Total liabilities

     75,247       75,150  

Equity:

    

Common shares, without par value:

    

Authorized – 35,000,000 shares;

    

Outstanding – 26,124,393 shares at June 30, 2019 and 26,117,045 shares at December 31, 2018 (after deducting treasury shares of 924,403 and 931,751, respectively), at stated capital amounts

     5,104       5,102  

Additional paid-in capital

     2,943       2,539  

Retained earnings

     319,600       308,914  

Accumulated other comprehensive loss

     (22,298     (23,423
  

 

 

   

 

 

 

Total equity

     305,349       293,132  
  

 

 

   

 

 

 

Total liabilities and equity

   $ 380,596     $ 368,282  
  

 

 

   

 

 

 

See notes to consolidated financial statements (unaudited).

 

4


THE GORMAN-RUPP COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

     Six Months Ended
June 30,
 
(Dollars in thousands)    2019     2018  

Cash flows from operating activities:

    

Net income

   $ 17,702     $ 19,790  

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     7,095       7,210  

Pension expense

     1,411       3,660  

Contributions to pension plan

     —         (4,000

Stock based compensation

     474       606  

Changes in operating assets and liabilities:

    

Accounts receivable, net

     (7,707     (7,254

Inventories, net

     8,765       (5,214

Accounts payable

     (2,396     966  

Commissions payable

     (836     1,025  

Deferred revenue and customer deposits

     2,028       (765

Income taxes

     1,577       (3,839

Accrued expenses and other

     (900     (2,727

Benefit obligations

     (725     4,879  
  

 

 

   

 

 

 

Net cash provided by operating activities

     26,488       14,337  

Cash used for investing activities:

    

Capital additions

     (3,464     (5,479

Proceeds (purchases) of short-term investments, net

     (2     2,969  
  

 

 

   

 

 

 

Net cash used for investing activities

     (3,466     (2,510

Cash used for financing activities:

    

Cash dividends

     (7,053     (6,527

Other

     (452     (459
  

 

 

   

 

 

 

Net cash used for financing activities

     (7,505     (6,986

Effect of exchange rate changes on cash

     190       (800
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     15,707       4,041  

Cash and cash equivalents:

    

Beginning of period

     46,458       79,680  
  

 

 

   

 

 

 

End of period

   $ 62,165     $ 83,721  
  

 

 

   

 

 

 

See notes to consolidated financial statements (unaudited).

 

5


THE GORMAN-RUPP COMPANY

CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)

 

(Dollars in thousands, except share and per share amounts)    Common Shares      Additional
Paid-In
    Retained     Accumulated
Other
Comprehensive
       
     Shares      Dollars      Capital     Earnings     (Loss) Income     Total  

Balances December 31, 2018

     26,117,045      $ 5,102      $ 2,539     $ 308,914     $ (23,423   $ 293,132  

Net income

             7,222         7,222  

Other comprehensive income

               164       164  

Stock based compensation

     6,647        1        (81     35         (45

Cash dividends - $0.135 per share

             (3,526       (3,526
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

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  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

(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  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements (unaudited).

 

6


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in tables in thousands of dollars, except for per share amounts)

NOTE 1 - BASIS OF PRESENTATION OF FINANCIAL STATEMENTS

The accompanying unaudited Consolidated Financial 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 Form 10-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 six months ended June 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 Form 10-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 ASU 2016-02, “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 to pre-existing U.S. GAAP. Subsequent accounting standards updates have been issued, which amend and/or clarify the application of ASU 2016-02. 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
June 30,
     Six Months Ended
June 30,
 
     2019      2018      2019      2018  

Pumps and pump systems

   $ 92,167      $ 97,784      $ 174,688      $ 178,611  

Repair parts for pumps and pump systems and other

     16,163        14,043        30,501        29,820  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total net sales

   $ 108,330      $ 111,827      $ 205,189      $ 208,431  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

7


     Geographic Location  
     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2019      2018      2019      2018  

United States

   $ 74,784      $ 71,519      $ 142,485      $ 135,952  

Foreign countries

     33,546        40,308        62,704        72,479  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total net sales

   $ 108,330      $ 111,827      $ 205,189      $ 208,431  
  

 

 

    

 

 

    

 

 

    

 

 

 

International sales represented approximately 31% and 36% of total net sales for the second quarter of 2019 and 2018, 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 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 June 30, 2019, the Company had $107.0 million of remaining performance obligations, also referred to as backlog. The Company expects to recognize as revenue substantially all of its remaining performance obligations within one year.

Contract Estimates

Accounting for long-term contracts involves the use of various techniques to estimate total contract revenue and costs. For long-term contracts, the Company estimates the profit on a contract as the difference between the total estimated revenue and expected costs to complete a contract and recognizes that profit as performance obligations are satisfied. Contract estimates are based on various assumptions to project the outcome of future events that could span longer than one year. These assumptions include labor productivity and availability, the complexity of the work to be performed, the cost and availability of materials, and the performance of subcontractors as applicable.

As a significant change in one or more of these estimates could affect the profitability of our contracts, the Company reviews and updates its contract-related estimates regularly. Adjustments in estimated profit on contracts are accounted for under the cumulative catch-up method. Under this method, the impact of the adjustment on profit recorded to date on a contract is recognized in the period the adjustment is identified. Revenue and profit in future periods of contract performance are recognized using the adjusted estimate.

 

8


Contract Balances

The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (contract assets), and customer advances and deposits (contract liabilities) 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 a contract-by-contract basis at the end of each reporting period.

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

 

     June 30,
2019
     December 31,
2018
 

Contract assets

   $ 801      $ 1,953  

Contract liabilities

   $ 7,260      $ 5,232  

Revenue recognized for the six months ended June 30, 2019 and 2018 that was included in the contract liabilities balance at the beginning of the period was $4.9 million and $3.3 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 $65.2 million and $63.7 million at June 30, 2019 and December 31, 2018, respectively. Allowances for excess and obsolete inventory totaled $5.4 million and $5.3 million at June 30, 2019 and December 31, 2018, respectively. An actual valuation of inventory under the LIFO method is made at the end of each year based on the inventory levels and costs at that time. Interim LIFO calculations are based on management’s estimate of expected year-end inventory levels and costs, and are subject to the final year-end LIFO inventory valuation.

Inventories are comprised of the following:

 

Inventories, net:

   June 30,
2019
     December 31,
2018
 

Raw materials and in-process

   $ 17,985      $ 21,773  

Finished parts

     50,584        54,209  

Finished products

     10,240        11,405  
  

 

 

    

 

 

 

Total net inventories

   $ 78,809      $ 87,387  
  

 

 

    

 

 

 

NOTE 5 - PROPERTY, PLANT AND EQUIPMENT

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

 

     June 30,
2019
     December 31,
2018
 

Land

   $ 3,876      $ 3,869  

Buildings

     107,676        106,940  

Machinery and equipment

     180,338        177,668  
  

 

 

    

 

 

 
     291,890        288,477  

Less accumulated depreciation

     (181,364      (174,984
  

 

 

    

 

 

 

Property, plant and equipment, net

   $ 110,526      $ 113,493  
  

 

 

    

 

 

 

 

9


NOTE 6 - PRODUCT WARRANTIES

A liability is established for estimated future warranty and service claims based on historical claims experience and specific product failures. The Company expenses warranty costs directly to Cost of products sold. Changes in the Company’s product warranties liability are:

 

     June 30,  
     2019      2018  

Balance at beginning of year

   $ 1,380      $ 1,098  

Provision

     948        586  

Claims

     (822      (686
  

 

 

    

 

 

 

Balance at end of period

   $ 1,506      $ 998  
  

 

 

    

 

 

 

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 a non-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
June 30,
     Three Months Ended
June 30,
 
     2019      2018      2019      2018  

Service cost

   $ 535      $ 602      $ 270      $ 194  

Interest cost

     581        632        236        141  

Expected return on plan assets

     (836      (1,103      —        —  

Amortization of prior service cost

     —        —        (282      (282

Recognized actuarial loss (gain)

     472        421        7        (104

Settlement loss

     —        2,229        —        —  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic benefit cost (a)

   $ 752      $ 2,781      $ 231      $ (51
  

 

 

    

 

 

    

 

 

    

 

 

 

 

10


     Pension Benefits      Postretirement Benefits  
     Six Months Ended
June 30,
     Six Months Ended
June 30,
 
     2019      2018      2019      2018  

Service cost

   $ 1,102      $ 1,295      $ 541      $ 388  

Interest cost

     1,227        1,238        471        282  

Expected return on plan assets

     (1,781      (2,307      —        —  

Amortization of prior service cost

     —        —        (564      (565

Recognized actuarial loss (gain)

     863        818        14        (207

Settlement loss

     —        2,616        —        —  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic benefit cost (a)

   $ 1,411      $ 3,660      $ 462      $ (102
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(a)

The components of net periodic benefit cost other than the service cost component are included in Other income (expense), net in the Consolidated Statements of Income.

NOTE 8 - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The reclassifications out of Accumulated other comprehensive income (loss) as reported in the Consolidated Statements of Income are:

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2019      2018      2019      2018  

Pension and other postretirement benefits:

           

Recognized actuarial loss (a)

   $ 479      $ 317      $ 877      $ 611  

Settlement loss (b)

     —          2,229        —          2,616  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total before income tax

   $ 479      $ 2,546      $ 877      $ 3,227  

Income tax

     (101      (625      (183      (796
  

 

 

    

 

 

    

 

 

    

 

 

 

Net of income tax

   $ 378      $ 1,921      $ 694      $ 2,431  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(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

     —          877        877  

Current period benefit

     431        —          431  

Income tax benefit (charge)

     —          (183      (183
  

 

 

    

 

 

    

 

 

 

Balance at June 30, 2019

   $ (7,812    $ (14,486    $ (22,298
  

 

 

    

 

 

    

 

 

 

 

11


     Currency
Translation
Adjustments
     Pension and
Other
Postretirement
Benefits
     Accumulated
Other
Comprehensive
Income (Loss)
 

Balance at December 31, 2017

   $ (5,321    $ (7,188    $ (12,509

Reclassification adjustments

     —          3,227        3,227  

Current period benefit

     (1,666      —          (1,666

Income tax charge

     —          (796      (796
  

 

 

    

 

 

    

 

 

 

Balance at June 30, 2018

   $ (6,987    $ (4,757    $ (11,744
  

 

 

    

 

 

    

 

 

 

NOTE 9 - LEASES

On January 1, 2019, the Company adopted ASU 2016-02 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 ASU 2016-02, 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 lease right-of-use assets and lease liabilities of $1.6 million as of January 1, 2019.

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 other build-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 June 30,
2019
     Six Months
Ended June 30,
2019
 

Components of lease costs:

     

Operating lease costs

   $ 140      $ 267  

Short-term lease costs

     65        176  

Finance lease costs

     31        36  
  

 

 

    

 

 

 

Total lease costs

   $ 236      $ 479  
  

 

 

    

 

 

 

 

     As of June 30,
2019
 

Weighted average remaining lease term (years):

  

Operating leases

     3.0  

Finance lease

     4.8  

Weighted average discount rate:

  

Operating leases

     3.25

Finance lease

     3.25

 

12


     As of June 30, 2019  
     Operating
Leases
     Financing
Leases
     Total
Leases
 

Other assets - right-of-use assets

   $ 1,317      $ 606      $ 1,923  
  

 

 

    

 

 

    

 

 

 

Lease liabilities included in:

        

Accrued expenses - current portion of lease liabilities

   $ 609      $ 120      $ 729  

Other long-term liabilities - non-current portion of lease liabilities

     707        488        1,195  
  

 

 

    

 

 

    

 

 

 

Total lease liabilities

   $ 1,316      $ 608      $ 1,924  
  

 

 

    

 

 

    

 

 

 

Maturities of lease liabilities are as follows:

 

     As of June 30,
2019
     As of December 31,
2018
 

2019

   $ 442      $ 702  

2020

     592        411  

2021

     428        260  

2022

     292        124  

2023

     220        75  

Thereafter

     45        10  
  

 

 

    

 

 

 

Total lease payments

   $ 2,019      $ 1,582  
     

 

 

 

Less: Interest

     (95   
  

 

 

    

Present value of lease liabilities

   $ 1,924     
  

 

 

    

 

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Amounts in tables in thousands of dollars, except for per share amounts)

The following discussion and analysis of the Company’s financial condition and 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 Form 10-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 Form 10-K for the year ended December 31, 2018.

Executive Overview

The following discussion of Results of Operations includes certain non-GAAP financial data and measures such as adjusted earnings before interest, taxes, depreciation and amortization and adjusted earnings per share amounts which exclude non-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 of non-comparable factors. The Gorman-Rupp Company believes that these non-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.

 

13


     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2019      2018      2019      2018  

Adjusted earnings per share:

           

Reported earnings per share – GAAP basis

   $ 0.40      $ 0.39      $ 0.68      $ 0.76  

Plus pension settlement charge per share

     —          0.07        —          0.08  
  

 

 

    

 

 

    

 

 

    

 

 

 

Non-GAAP adjusted earnings per share

   $ 0.40      $ 0.46      $ 0.68      $ 0.84  
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted earnings before interest, taxes, depreciation and amortization:

           

Reported net income–GAAP basis

   $ 10,480      $ 10,173      $ 17,702      $ 19,790  

Plus income taxes

     2,955        2,413        4,975        5,452  

Plus depreciation and amortization

     3,529        3,610        7,095        7,210  
  

 

 

    

 

 

    

 

 

    

 

 

 

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

     16,964        16,196        29,772        32,452  

Plus pension settlement charge

     —          2,229        —          2,616  
  

 

 

    

 

 

    

 

 

    

 

 

 

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

   $ 16,964      $ 18,425      $ 29,772      $ 35,068  
  

 

 

    

 

 

    

 

 

    

 

 

 

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 June 30, 2019. The Company’s cash position increased $15.7 million during the first six months of 2019 to $62.2 million at June 30, 2019 and the Company generated $17.0 million in adjusted earnings before interest, taxes, depreciation and amortization during the same period.

Capital expenditures for the first six months of 2019 were $3.5 million and consisted primarily of machinery and equipment. Capital expenditures for 2019 are presently planned to be in the range of $15-$20 million primarily for building expansion and machinery and equipment purchases, and are expected to be financed through internally-generated funds.

Net sales for the second quarter of 2019 were $108.3 million compared to record net sales of $111.8 million for the second quarter of 2018, a decrease of 3.1% or $3.5 million. Domestic sales increased 4.6% or $3.3 million while international sales decreased 16.8% or $6.8 million compared to the same period in 2018.

Gross profit was $28.2 million for the second quarter of 2019, resulting in gross margin of 26.0%, compared to gross profit of $29.9 million and gross margin of 26.7% for the same period in 2018. Material costs as a percentage of sales were flat in the second quarter of 2019 compared to the same period last year as selling price increases implemented at the beginning of 2019 were realized. The 70 basis points decrease in gross margin was due principally to the loss of leverage from lower sales volume compared to the second quarter of 2018.

 

14


Selling, general and administrative (“SG&A”) expenses were $15.0 million and 13.8% of net sales for the second quarter of 2019 compared to $14.9 million and 13.3% of net sales for the same period in 2018. SG&A expenses as a percentage of sales increased 50 basis points due principally to the loss of leverage from lower sales volume.

Operating income was $13.2 million, resulting in operating margin of 12.2%, for the second quarter of 2019, compared to operating income of $15.0 million and operating margin of 13.4% for the same period in 2018. Operating margin decreased 120 basis points due principally to the loss of leverage from lower sales volume.

The Company’s effective tax rate increased to 22.0% for the second quarter of 2019 from 19.2% for the second quarter of 2018 due primarily to pension plan contributions made in the second quarter of 2018 which were eligible for tax deduction at the prior 35.0% federal corporate tax rate.

Net income was $10.5 million for the second quarter of 2019 compared to $10.2 million in the second quarter of 2018, and earnings per share were $0.40 and $0.39 for the respective periods. A non-cash pension settlement charge reduced second quarter of 2018 earnings by $0.07 per share.

Net sales for the first six months of 2019 were $205.2 million compared to $208.4 million for the first six months of 2018, a decrease of 1.6% or $3.2 million. Domestic sales increased 4.8% or $6.6 million while international sales decreased 13.5% or $9.8 million compared to the same period in 2018.

Gross profit was $51.5 million for the first six months of 2019, resulting in gross margin of 25.1%, compared to gross profit of $56.1 million and gross margin of 26.9% for the same period in 2018. Gross margin decreased 180 basis points largely as a result of material cost increases due to inflation, tariffs and higher freight costs. Gross margin in the second quarter of 2019 improved from the first quarter of 2019 as selling price increases implemented at the beginning of the year were more fully realized.

SG&A expenses were $29.4 million and 14.3% of net sales for the first six months of 2019 compared to $29.2 million and 14.0% of net sales for the 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 $22.2 million, resulting in operating margin of 10.8%, for the first six months of 2019, compared to operating income of $26.8 million and operating margin of 12.9% for the same period in 2018. Operating margin decreased 210 basis points due principally to material cost increases, which were partially offset by selling price increases.

Net income was $17.7 million for the first six months of 2019 compared to $19.8 million in the first six months of 2018, and earnings per share were $0.68 and $0.76 for the respective periods. The first six months of 2018 earnings were reduced by non-cash pension settlement charges of $0.08 per share.

The Company’s backlog of orders was $107.0 million at June 30, 2019 compared to $128.9 million at June 30, 2018 and $113.7 million at December 31, 2018. The backlog at June 30, 2019 decreased 17.0% compared to June 30, 2018 driven by decreased incoming orders in several of the markets the Company serves, most notably in the fire protection, construction, industrial and municipal markets.

On July 25, 2019, the Board of Directors authorized the payment of a quarterly dividend of $0.135 per share on the common stock of the Company, payable September 10, 2019, to shareholders of record as of August 15, 2019. This will mark the 278th consecutive quarterly dividend paid by The Gorman-Rupp Company. The dividend yield at June 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.

Outlook

Although material costs have generally stabilized since the fourth quarter of 2018, uncertainty remains around trade policy issues and potential new tariffs. Our incoming order rate softened during the second quarter of 2019, which will make top line growth more challenging in the second half of the year. Global economic conditions impacted incoming orders in international markets, while adverse weather in many parts of the U.S. put pressure on construction projects and the agriculture market. Our underlying fundamentals remain strong and we believe that we remain well positioned to drive long-term growth.

 

15


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

Net Sales

 

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

Net Sales

   $ 108,330      $ 111,827      $ (3,497      (3.1 )% 

Net sales for the second quarter of 2019 were $108.3 million compared to record net sales of $111.8 million for the second quarter of 2018, a decrease of 3.1% or $3.5 million. Domestic sales increased 4.6% or $3.3 million while international sales decreased 16.8% or $6.8 million compared to the same period in 2018.

Sales in our water markets decreased 4.8% or $3.8 million in the second quarter of 2019 compared to the second quarter of 2018. Sales in the fire protection market decreased $2.7 million driven primarily by softness in international markets. Sales in the municipal market decreased $0.9 million, and sales in the agriculture market decreased $0.5 million. These decreases were partially offset by increased sales in the construction market of $0.3 million.

Sales in our non-water markets increased 1.0% or $0.3 million during the second quarter of 2019 compared to the second quarter of 2018. Sales in the petroleum market increased $1.5 million driven primarily by mid-stream oil and gas customers, and sales in the OEM market increased $1.0 million primarily related to power generation equipment and services. These increases were partially offset by decreased sales in the industrial market of $2.2 million due primarily to softness in the upstream oil and gas market.

International sales were $33.5 million in the second quarter of 2019 compared to $40.3 million in the same period last year and represented 31% and 36% of total sales for the Company, respectively. International sales decreased $3.3 million in the fire protection market driven primarily by softness in the oil and gas industry and $1.7 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
June 30,
       
     2019     2018     $ Change      % Change  

Cost of products sold

   $ 80,138     $ 81,962     $ (1,824      (2.2 )% 

% of Net sales

     74.0     73.3     

Gross Margin

     26.0     26.7     

Gross profit was $28.2 million for the second quarter of 2019, resulting in gross margin of 26.0%, compared to gross profit of $29.9 million and gross margin of 26.7% for the same period in 2018. Material costs as a percentage of sales were flat in the second quarter of 2019 compared to the same period last year as selling price increases implemented at the beginning of 2019 were realized. The 70 basis points decrease in gross margin was due principally to the loss of leverage from lower sales volume compared to the second quarter of 2018.

 

16


Selling, General and Administrative (SG&A) Expenses

 

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

Selling, general and administrative expenses

   $ 14,988     $ 14,872     $ 116        0.8

% of Net sales

     13.8     13.3     

Selling, general and administrative (“SG&A”) expenses were $15.0 million and 13.8% of net sales for the second quarter of 2019 compared to $14.9 million and 13.3% of net sales for the same period in 2018. SG&A expenses as a percentage of sales increased 50 basis points due principally to the loss of leverage from lower sales volume.

Operating Income

 

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

Operating income

   $ 13,204     $ 14,993     $ (1,789      (11.9 )% 

% of Net sales

     12.2     13.4     

Operating income was $13.2 million, resulting in operating margin of 12.2%, for the second quarter of 2019, compared to operating income of $15.0 million and operating margin of 13.4% for the same period in 2018. Operating margin decreased 120 basis points due principally to the loss of leverage from lower sales volume.

Net Income

 

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

Income before income taxes

   $ 13,435     $ 12,586     $ 849        6.7

% of Net sales

     12.4     11.3     

Income taxes

   $ 2,955     $ 2,413     $ 542        22.5

Effective tax rate

     22.0     19.2     

Net income

   $ 10,480     $ 10,173     $ 307        3.0

% of Net sales

     9.7     9.1     

Earnings per share

   $ 0.40     $ 0.39     $ 0.01        2.6

The Company’s effective tax rate increased to 22.0% for the second quarter of 2019 from 19.2% for the second quarter of 2018 due primarily to pension plan contributions made in the second quarter of 2018 which were eligible for tax deduction at the prior 35.0% federal corporate tax rate.

The increase in net income in the second quarter of 2019 compared to the same period in 2018 of $0.3 million was due primarily to a non-cash pension charge of $1.7 million, net of income taxes, in the second quarter of 2018 that did not recur in the second quarter of 2019.

Earnings per share for the second quarter of 2018 included a non-cash pension settlement charge of $0.07 per share.

 

17


Six Months Ended June 30, 2019 vs. Six Months Ended June 30, 2018

Net Sales

 

     Six Months Ended
June 30,
        
     2019      2018      $ Change      % Change  

Net Sales

   $ 205,189      $ 208,431      $ (3,242      (1.6 )% 

Net sales for the first six months of 2019 were $205.2 million compared to $208.4 million for the first six months of 2018, a decrease of 1.6% or $3.2 million. Domestic sales increased 4.8% or $6.6 million while international sales decreased 13.5% or $9.8 million compared to the same period in 2018.

Sales in our water markets decreased 0.5% or $0.7 million in the first six months of 2019 compared to the first six months of 2018. Sales in the municipal market increased $3.7 million driven primarily by infrastructure needs domestically, and sales in the construction market increased $2.7 million due primarily to sales to rental market customers. These increases were offset by decreased sales in the fire protection market of $5.2 million driven by softness in international markets and in the agriculture market of $1.9 million primarily due to adverse weather conditions.

Sales in our non-water markets decreased 4.0% or $2.5 million during the first six months of 2019 compared to the first six months of 2018. Sales in the petroleum market increased $0.9 million driven primarily by mid-stream oil and gas customers. This increase was offset by decreased sales in the industrial market of $3.1 million due primarily to softness in the upstream oil and gas market and decreased sales in the OEM market of $0.3 million.

International sales were $62.7 million in the first six months of 2019 compared to $72.5 million in the same period last year and represented 31% and 35% of total sales for the Company, respectively. International sales decreased most notably in the fire protection, municipal and construction markets.

Cost of Products Sold and Gross Profit

 

     Six Months Ended
June 30,
       
     2019     2018     $ Change      % Change  

Cost of products sold

   $ 153,684     $ 152,360     $ 1,324        0.9

% of Net sales

     74.9     73.1     

Gross Margin

     25.1     26.9     

Gross profit was $51.5 million for the first six months of 2019, resulting in gross margin of 25.1%, compared to gross profit of $56.1 million and gross margin of 26.9% for the same period in 2018. Gross margin decreased 180 basis points largely as a result of material cost increases due to inflation, tariffs and higher freight costs. Gross margin in the second quarter of 2019 improved from the first quarter of 2019 as selling price increases implemented at the beginning of the year were more fully realized.

Selling, General and Administrative (SG&A) Expenses

 

     Six Months Ended
June 30,
       
     2019     2018     $ Change      % Change  

Selling, general and administrative expenses

   $ 29,351     $ 29,228     $ 123        0.4

% of Net sales

     14.3     14.0     

 

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SG&A expenses were $29.4 million and 14.3% of net sales for the first six months of 2019 compared to $29.2 million and 14.0% of net sales for the 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

 

     Six Months Ended
June 30,
       
     2019     2018     $ Change      % Change  

Operating income

   $ 22,154     $ 26,843     $ (4,689      (17.5 )% 

% of Net sales

     10.8     12.9     

Operating income was $22.2 million, resulting in operating margin of 10.8%, for the first six months of 2019, compared to operating income of $26.8 million and operating margin of 12.9% for the same period in 2018. Operating margin decreased 210 basis points due principally to material cost increases, which were partially offset by selling price increases.

Net Income

 

     Six Months Ended
June 30,
             
     2019     2018     $ Change     % Change  

Income before income taxes

   $ 22,677       25,242     $ (2,565     (10.2 )% 

% of Net sales

     11.1     12.1    

Income taxes

   $ 4,975     $ 5,452     $ (477     (8.7 )% 

Effective tax rate

     21.9     21.6    

Net income

   $ 17,702     $ 19,790     $ (2,088     (10.6 )% 

% of Net sales

     8.6     9.5    

Earnings per share

   $ 0.68     $ 0.76     $ (0.08     (10.5 )% 

The decrease in net income in the first six months of 2019 compared to the same period in 2018 of 2.1 million was due primarily to material cost increases resulting from inflation, tariffs and higher freight costs. Net income in the first six months of 2018 included a non-cash pension settlement charge $2.0 million, net of income taxes.

Earnings per share for the first six months of 2018 included a non-cash pension settlement charge of $0.08 per share.

Liquidity and Capital Resources

Cash and cash equivalents totaled $62.2 million and there was no outstanding bank debt at June 30, 2019. The Company had $24.0 million available in bank lines of credit after deducting $7.0 million in outstanding letters of credit primarily related to customer orders. The Company was in compliance with its debt covenants, including limits on additional borrowings and maintenance of certain operating and financial ratios, at June 30, 2019 and December 31, 2018.

Free cash flow, a non-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:

 

     Six Months Ended
June 30,
 
     2019      2018  

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

   $ 29,772      $ 35,068  

Less capital expenditures

     (3,464      (5,479

Less cash dividends

     (7,053      (6,527
  

 

 

    

 

 

 

Non-GAAP free cash flow

   $ 19,255      $ 23,062  
  

 

 

    

 

 

 

Financial Cash Flow

 

     Six Months Ended
June 30,
 
     2019      2018  

Beginning of period cash and cash equivalents

   $ 46,458      $ 79,680  

Net cash provided by operating activities

     26,488        14,337  

Net cash used for investing activities

     (3,466      (2,510

Net cash used for financing activities

     (7,505      (6,986

Effect of exchange rate changes on cash

     190        (800
  

 

 

    

 

 

 

Net increase in cash and cash equivalents

     15,707        4,041  
  

 

 

    

 

 

 

End of period cash and cash equivalents

   $ 62,165      $ 83,721  
  

 

 

    

 

 

 

The increase in cash provided by operating activities in the first half of 2019 compared to the same period last year was primarily due to lower inventories driven by a planned inventory reduction and decreases in income taxes payable and pension contributions. These negative effects on cash flow were offset by valuation adjustments to prepaid pension assets.

During the first half of 2019, investing activities primarily consisted of capital expenditures for machinery and equipment of $3.5 million. During the first half of 2018, investing activities of $2.5 million primarily consisted of capital expenditures for machinery and equipment of $5.5 million partially offset by proceeds from short-term investments of $3.0 million.

Net cash used for financing activities for the first half of 2019 and 2018 primarily consisted of dividend payments of $7.1 million and $6.5 million, respectively.

The Company currently expects to continue its exceptional history of paying regular quarterly dividends and increased annual dividends. However, any future dividends will be reviewed individually and declared by our Board of Directors at its discretion, dependent on our assessment of the Company’s financial condition and business outlook at the applicable time.

Critical Accounting Policies

Our critical accounting policies are described in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and in the notes to our Consolidated Financial Statements for the year ended December 31, 2018 contained in our Annual Report on Form 10-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 Form 10-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 Form 10-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 half of 2019 and the first half of 2018 were $74,000 and $(0.5) 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.

 

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 Form 10-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 June 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 Form 10-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 Form 10-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 Form 10-Q of The Gorman-Rupp Company for the quarter ended June 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: July 30, 2019

   
 

By:

 

/s/ James C. Kerr

   

James C. Kerr

   

Vice President and Chief Financial Officer

 

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