THE GORMAN-RUPP COMPANY (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 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 endedDecember 31, 2019 . The coronavirus (COVID-19) pandemic had an adverse effect on the Company's reported results for the first half of 2020. Many of our customers are considered "essential" and have remained operational, although in some cases in a limited capacity. This, together with the overall economic downturn that has resulted from the pandemic, slowed demand in the second quarter, which could continue into the second half of 2020. Nearly all of our facilities have remained operational and while there are some restrictions to the supply of materials and products globally, our supply chain has remained strong. The extent to which the Company's operations continue to be impacted by the pandemic will depend largely on future developments, which are highly uncertain and cannot be accurately predicted, including new information which may emerge concerning the severity of the pandemic and actions by government authorities to contain the pandemic or treat its impact, among other things. 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 2020. 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. 12 --------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019
Adjusted earnings per share:
Reported earnings per share - GAAP basis $ 0.22 $ 0.40 $ 0.43 $ 0.68
Plus pension settlement charge per share 0.06 - 0.10 -
Non-GAAP adjusted earnings per share
0.53
Adjusted earnings before interest, taxes, depreciation and amortization: Reported net income-GAAP basis$ 5,634 $ 10,480 $ 11,120 $ 17,702 Plus income taxes 1,433 2,955 2,837 4,975 Plus depreciation and amortization 3,143 3,529 6,325 7,095 Non-GAAP earnings before interest, taxes, depreciation and amortization 10,210 16,964 20,282 29,772 Plus pension settlement charge 1,904 - 3,382 - Non-GAAP adjusted earnings before interest, taxes, depreciation and amortization$ 12,114 $ 16,964 $ 23,664 $ 29,772 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.
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 for more than 85 years. The Company places a strong emphasis on cash flow generation and maintaining excellent liquidity and financial flexibility. This focus has afforded us the ability to reinvest our cash resources and preserve a strong balance sheet to position us to weather the COVID-19 pandemic and, for future acquisition and product development opportunities. The Company had no bank debt as ofJune 30, 2020 . The Company's cash position increased$5.2 million during the first six months of 2020 to$85.8 million atJune 30, 2020 and the Company generated$23.7 million in adjusted earnings before interest, taxes, depreciation and amortization during the same period. Capital expenditures for the first six months of 2020 were$3.5 million and consisted primarily of machinery and equipment and building improvements. Capital expenditures for the full-year 2020 are presently planned to be in the range of$10-$12 million primarily for building improvements and machinery and equipment purchases, and are expected to be financed through internally-generated funds. Net sales for the second quarter of 2020 were$85.8 million compared to net sales of$108.3 million for the second quarter of 2019, a decrease of 20.8% or$22.5 million . Domestic sales decreased 20.2% or$15.1 million and international sales decreased 22.0% or$7.4 million compared to the same period in 2019. Sales have decreased across all of our markets primarily as a result of the COVID-19 pandemic, along with a slowdown in the oil and gas industry. Gross profit was$21.8 million for the second quarter of 2020, resulting in gross margin of 25.5%, compared to gross profit of$28.2 million and gross margin of 26.0% for the same period in 2019. Gross margin decreased 50 basis points due principally to loss of leverage on fixed labor and overhead from lower sales volume compared to the second quarter of 2019, partially offset by product mix and selling price increases implemented in 2019 being fully realized. Selling, general and administrative ("SG&A") expenses were$12.9 million and 15.0% of net sales for the second quarter of 2020 compared to$15.0 million and 13.8% of net sales for the same period in 2019. SG&A expenses decreased 14.3% or$2.1 million due to reduced payroll related and travel expenses combined with overall expense management. SG&A expenses as a percentage of sales increased 120 basis points primarily as a result of loss of leverage from lower sales volume. 13
-------------------------------------------------------------------------------- Operating income was$9.0 million for the second quarter of 2020, resulting in an operating margin of 10.5%, compared to operating income of$13.2 million and operating margin of 12.2% for the same period in 2019. Operating margin decreased 170 basis points primarily as a result of loss of leverage from lower sales volume. Other income (expense), net was$1.9 million of expense for the second quarter of 2020 compared to income of$0.2 million for the same period in 2019. The increase to expense was due primarily to a non-cash pension settlement charge of$1.9 million which occurred in the second quarter of 2020. Net income was$5.6 million for the second quarter of 2020 compared to$10.5 million in the second quarter of 2019, and earnings per share were$0.22 and$0.40 for the respective periods. Earnings per share for the second quarter of 2020 included a non-cash pension settlement charge of$0.06 per share. Net sales for the first six months of 2020 were$177.5 million compared to net sales of$205.2 million for the first six months of 2019, a decrease of 13.5% or$27.7 million . Domestic sales decreased 12.3% or$17.5 million and international sales decreased 16.3% or$10.2 million compared to the same period in 2019. Sales have decreased across most of our markets primarily as a result of the COVID-19 pandemic, along with a slowdown in the oil and gas industry. Gross profit was$45.3 million for the first six months of 2020, resulting in gross margin of 25.5%, compared to gross profit of$51.5 million and gross margin of 25.1% for the same period in 2019. Gross margin improved 40 basis points due principally to lower material costs of 260 basis points as a result of the stabilization of material costs and selling price increases implemented in 2019 being fully realized. Partially offsetting these improvements was loss of leverage on fixed labor and overhead from lower sales volume compared to the first six months of 2019. SG&A expenses were$27.7 million and 15.6% of net sales for the first six months of 2020 compared to$29.4 million and 14.3% of net sales for the same period in 2019. SG&A expenses decreased 5.5% or$1.6 million due to reduced payroll related and travel expenses combined with overall expense management. SG&A expenses as a percentage of sales increased 130 basis points primarily as a result of loss of leverage from lower sales volume. Operating income was$17.6 million for the first six months of 2020, resulting in an operating margin of 9.9%, compared to operating income of$22.2 million and operating margin of 10.8% for the same period in 2019. Operating margin decreased 90 basis points primarily as a result of loss of leverage from lower sales volume partially offset by lower material costs. Other income (expense), net was$3.6 million of expense for the first six months of 2020 compared to income of$0.5 million for the same period in 2019. The increase to expense was due primarily to non-cash pension settlement charges of$3.4 million and$0.5 million of foreign exchange losses, which both occurred in the first six months of 2020. Net income was$11.1 million for the first six months of 2020 compared to$17.7 million in the first six months of 2019, and earnings per share were$0.43 and$0.68 for the respective periods. Earnings per share for the first six months of 2020 included non-cash pension settlement charges of$0.10 per share. The Company's backlog of orders was$110.3 million atJune 30, 2020 compared to$107.0 million atJune 30, 2019 and$105.0 million atDecember 31, 2019 . Incoming orders decreased 7.9% for the first six months of 2020 compared to the same period in 2019. Incoming orders were down across most markets the Company serves driven primarily by the COVID-19 pandemic and a slowdown in the oil and gas industry. OnJuly 23, 2020 , the Board of Directors authorized the payment of a quarterly dividend of$0.145 per share on the common stock of the Company, payableSeptember 10, 2020 , to shareholders of record as ofAugust 14, 2020 . This will mark the 282nd consecutive quarterly dividend paid byThe Gorman-Rupp Company . 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 While we are actively managing our response to the COVID-19 pandemic, its impact on our full-year 2020 results and beyond is uncertain. We serve as an essential business providing products that are critical to our customers. All of our manufacturing facilities continue to operate while closely following all national and local guidelines to provide for the health and safety of those working in these facilities. We expect our sales to remain challenging over the near-term as a result of uncertainty related to the ultimate impact of COVID-19 and continued oil and gas market softness. Incoming orders during the first six months were down across most of the markets the Company serves. 14 -------------------------------------------------------------------------------- Our underlying fundamentals remain strong and we believe that we remain well positioned to weather the COVID-19 pandemic and continue to drive long-term growth. Our strong balance sheet provides us with the flexibility to continue to evaluate acquisition opportunities and new product development that we expect will help add value to our operations over the longer term. An infrastructure bill including support for investment in water, wastewater and flood control would be beneficial.
Three Months Ended
Net Sales Three Months Ended June 30, 2020 2019 $ Change % Change Net Sales$ 85,814 $ 108,330 $ (22,516 ) (20.8 )% Net sales for the second quarter of 2020 were$85.8 million compared to net sales of$108.3 million for the second quarter of 2019, a decrease of 20.8% or$22.5 million . Domestic sales decreased 20.2% or$15.1 million and international sales decreased 22.0% or$7.4 million compared to the same period in 2019. Sales have decreased across all of our markets primarily as a result of the COVID-19 pandemic, along with a slowdown in the oil and gas industry. Sales in our water markets decreased 19.1% or$14.5 million in the second quarter of 2020 compared to the second quarter of 2019. Sales in the construction market decreased$4.5 million driven primarily by softness in oil and gas drilling activity. Sales decreased in the fire protection market$3.6 million and in the repair market$3.1 million primarily as a result of the COVID-19 pandemic. Sales in the municipal market decreased$2.8 million driven primarily by timing of shipments related to weather and the COVID-19 pandemic. Also, sales in the agriculture market decreased$0.5 million . Sales in our non-water markets decreased 24.7% or$8.0 million in the second quarter of 2020 compared to the second quarter of 2019. Sales in the OEM market decreased$4.2 million driven primarily by slowing customer demand and travel restrictions due to the COVID-19 pandemic and softness in oil and gas drilling activity. Sales in the petroleum market decreased$2.8 million driven primarily by reduced demand from midstream oil and gas customers and softness in oil and gas drilling activity. Also, sales in the industrial market decreased$1.0 million . International sales were$26.2 million in the second quarter of 2020 compared to$33.5 million in the same period last year and represented 31% of total sales for both periods. The decrease in international sales was across most of the markets the Company serves, most notably in the fire protection market and in non-water markets.
Cost of Products Sold and Gross Profit
Three Months Ended
June 30,
2020 2019 $ Change % Change
Cost of products sold $ 63,965 $ 80,138 $ (16,173 ) (20.2 )%
% of Net sales 74.5 % 74.0 %
Gross Margin 25.5 % 26.0 %
Gross profit was $21.8 million for the second quarter of 2020, resulting in
gross margin of 25.5%, compared to gross profit of $28.2 million and gross
margin of 26.0% for the same period in 2019. Gross margin decreased 50 basis
points due principally to loss of leverage on fixed labor and overhead from
lower sales volume compared to the second quarter of 2019, partially offset by
product mix and selling price increases implemented in 2019 being fully
realized.
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Selling, General and Administrative (SG&A) Expenses
Three Months Ended
June 30,
2020 2019 $ Change % Change
Selling, general and administrative
expenses $ 12,852 $ 14,988 $ (2,136 ) (14.3 )%
% of Net sales 15.0 % 13.8 %
SG&A expenses were $12.9 million and 15.0% of net sales for the second quarter
of 2020 compared to $15.0 million and 13.8% of net sales for the same period in
2019. SG&A expenses decreased 14.3% or $2.1 million due to reduced payroll
related and travel expenses combined with overall expense management. SG&A
expenses as a percentage of sales increased 120 basis points primarily as a
result of loss of leverage from lower sales volume.
Operating Income
Three Months Ended
June 30,
2020 2019 $ Change % ChangeOperating income$ 8,997 $ 13,204 $ (4,207 ) (31.9 )% % of Net sales 10.5 % 12.2 % Operating income was$9.0 million for the second quarter of 2020, resulting in an operating margin of 10.5%, compared to operating income of$13.2 million and operating margin of 12.2% for the same period in 2019. Operating margin decreased 170 basis points primarily as a result of loss of leverage from lower sales volume. Net Income Three Months Ended June 30, 2020 2019 $ Change % Change Income before income taxes$ 7,067 $ 13,435 $ (6,368 ) (47.4 )% % of Net sales 8.2 % 12.4 % Income taxes$ 1,433 $ 2,955 $ (1,522 ) (51.5 )% Effective tax rate 20.3 % 22.0 % Net income$ 5,634 $ 10,480 $ (4,846 ) (46.2 )% % of Net sales 6.6 % 9.7 % Earnings per share$ 0.22 $ 0.40 $ (0.18 ) (45.0 )%
The Company's effective tax rate was 20.3% for the second quarter of 2020 compared to 22.0% for the second quarter of 2019 primarily due to favorable impact of discrete items.
The decrease in net income in the second quarter of 2020 compared to the same period in 2019 of$4.8 million included a non-cash pension settlement charge of$1.5 million , net of income taxes.
Earnings per share for the second quarter of 2020 included a non-cash pension
settlement charge of
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Six Months Ended
Net Sales Six Months Ended June 30, 2020 2019 $ Change % Change Net Sales$ 177,485 $ 205,189 $ (27,704 ) (13.5 )% Net sales for the first six months of 2020 were$177.5 million compared to net sales of$205.2 million for the first six months of 2019, a decrease of 13.5% or$27.7 million . Domestic sales decreased 12.3% or$17.5 million and international sales decreased 16.3% or$10.2 million compared to the same period in 2019. Sales have decreased across most of our markets primarily as a result of the COVID-19 pandemic, along with a slowdown in the oil and gas industry. Sales in our water markets decreased 12.7% or$18.3 million in the first six months of 2020 compared to the first six months of 2019. Sales in the agriculture market increased$0.3 million . This increase was offset by sales decreases in the construction market of$10.6 million driven primarily by softness in oil and gas drilling activity, in the repair market of$3.5 million due primarily to the COVID-19 pandemic, and in the municipal market of$3.0 million driven primarily by timing of shipments related to weather and the COVID-19 pandemic. Also, sales in the fire protection market decreased$1.5 million driven primarily by lower international shipments as a result of the COVID-19 pandemic. Sales in our non-water markets decreased 15.3% or$9.4 million in the first six months of 2020 compared to the first six months of 2019. Sales in the OEM market decreased$4.7 million driven primarily by slowing customer demand and travel restrictions due to the COVID-19 pandemic and softness in oil and gas drilling activity. Sales in the petroleum market decreased$3.9 million driven primarily by reduced demand from midstream oil and gas customers. Also, sales in the industrial market decreased$0.8 million . International sales were$52.5 million in the first six months of 2020 compared to$62.7 million in the same period last year and represented 30% and 31% of total sales, respectively. The decrease in international sales was across most of the markets the Company serves.
Cost of Products Sold and Gross Profit
Six Months Ended
June 30,
2020 2019 $ Change % Change
Cost of products sold $ 132,188 $ 153,684 $ (21,496 ) (14.0 )%
% of Net sales 74.5 % 74.9 %
Gross Margin 25.5 % 25.1 %
Gross profit was $45.3 million for the first six months of 2020, resulting in
gross margin of 25.5%, compared to gross profit of $51.5 million and gross
margin of 25.1% for the same period in 2019. Gross margin improved 40 basis
points due principally to lower material costs of 260 basis points as a result
of the stabilization of material costs and selling price increases implemented
in 2019 being fully realized. Partially offsetting these improvements was loss
of leverage on fixed labor and overhead from lower sales volume compared to the
first six months of 2019.
Selling, General and Administrative (SG&A) Expenses
Six Months Ended
June 30,
2020 2019 $ Change % Change
Selling, general and administrative
expenses $ 27,723 $ 29,351 $ (1,628 ) (5.5 )%
% of Net sales 15.6 % 14.3 %
SG&A expenses were $27.7 million and 15.6% of net sales for the first six months
of 2020 compared to $29.4 million and 14.3% of net sales for the same period in
2019. SG&A expenses decreased 5.5% or $1.6 million due to reduced payroll
related and travel expenses combined with overall expense management. SG&A
expenses as a percentage of sales increased 130 basis points primarily as a
result of loss of leverage from lower sales volume.
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Operating Income
Six Months Ended
June 30,
2020 2019 $ Change % Change
Operating income $ 17,574 $ 22,154 $ (4,580 ) (20.7 )%
% of Net sales 9.9 % 10.8 %
Operating income was $17.6 million for the first six months of 2020, resulting
in an operating margin of 9.9%, compared to operating income of $22.2 million
and operating margin of 10.8% for the same period in 2019. Operating margin
decreased 90 basis points primarily as a result of loss of leverage from lower
sales volume partially offset by lower material costs.
Net Income
Six Months Ended
June 30,
2020 2019 $ Change % Change
Income before income taxes $ 13,957 $ 22,677 $ (8,720 ) (38.5 )%
% of Net sales 7.9 % 11.1 %
Income taxes $ 2,837 $ 4,975 $ (2,138 ) (43.0 )%
Effective tax rate 20.3 % 21.9 %
Net income $ 11,120 $ 17,702 $ (6,582 ) (37.2 )%
% of Net sales 6.3 % 8.6 %
Earnings per share $ 0.43 $ 0.68 $ (0.25 ) (36.8 )%
The Company's effective tax rate was 20.3% for the first half of 2020 compared to 21.9% for the first half of 2019 primarily due to favorable impact of discrete items.
The decrease in net income in the first six months of 2020 compared to the same period in 2019 of$6.6 million included a non-cash pension settlement charge of$2.6 million , net of income taxes and foreign exchange losses of$0.4 million , net of income taxes.
Earnings per share for the first half of 2020 included a non-cash pension
settlement charge of
Liquidity and Capital Resources
Cash and cash equivalents totaled$85.8 million and there was no outstanding bank debt atJune 30, 2020 . The Company had$23.9 million available in bank lines of credit after deducting$7.1 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, atJune 30, 2020 andDecember 31, 2019 . 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. 18 --------------------------------------------------------------------------------
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,
2020 2019
Non-GAAP adjusted earnings before interest, taxes,
depreciation and amortization $ 23,664 $ 29,772
Less capital expenditures (3,457 ) (3,464 )
Less cash dividends (7,562 ) (7,053 )
Non-GAAP free cash flow $ 12,645 $ 19,255
Financial Cash Flow
Six Months Ended
June 30,
2020 2019
Beginning of period cash and cash equivalents
(3,457 ) (3,466 )
Net cash used for financing activities (8,208 ) (7,505 )
Effect of exchange rate changes on cash (179 ) 190
Net increase in cash and cash equivalents 5,230 15,707
End of period cash and cash equivalents
The decrease in cash provided by operating activities in the first six months of 2020 compared to the same period last year was primarily driven by lower sales volume, increased inventories and lower accounts receivable in the current period.
During the first six months of 2020 and 2019, investing activities consisted of
capital expenditures primarily for machinery and equipment and building
improvements of
Net cash used for financing activities for the first six months of 2020 and 2019
primarily consisted of dividend payments of
As we cannot predict the duration or scope of the COVID-19 pandemic and its impact on our customers and suppliers, the ultimate negative financial impact to our results cannot be reasonably estimated, but could be material. We are actively managing the business to maintain cash flow and we have significant liquidity. We believe that these factors will allow us to meet our anticipated funding requirements. The Company currently expects to continue its exceptional history of paying regular quarterly dividends and increased annual dividends. However, any future dividends will be reviewed individually and declared by our Board of Directors at its discretion, dependent on our assessment of the Company's financial condition and business outlook at the applicable time. Critical Accounting Policies Our critical accounting policies are described in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, and in the notes to our Consolidated Financial Statements for the year endedDecember 31, 2019 contained in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . Any new accounting policies or updates to existing accounting policies as a result of new accounting pronouncements have been discussed in the notes to our Consolidated Financial Statements in this Quarterly Report on 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.
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 concerningThe 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. 19
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Such factors include, but are not limited to: (1) continuation of the current and projected future business environment, including the duration and scope of the COVID-19 pandemic, the impact of the pandemic and actions taken in response to the pandemic; (2) highly competitive markets; (3) availability and costs of raw materials; (4) loss of key personnel; (5) cyber security threats; (6) intellectual property security; (7) acquisition performance and integration; (8) compliance with, and costs related to, a variety of import and export laws and regulations; (9) environmental compliance costs and liabilities; (10) exposure to fluctuations in foreign currency exchange rates; (11) conditions in foreign countries in whichThe Gorman-Rupp Company conducts business; (12) changes in our tax rates and exposure to additional income tax liabilities; (13) impairment in the value of intangible assets, including goodwill; (14) defined benefit pension plan settlement expense; (15) family ownership of common equity; and (16) risks described from time to time in our reports filed with theSecurities 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.
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