UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

 

 

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

For the fiscal year ended December 31, 2014

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

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

 

Name of each exchange on which registered

Common Shares, without par value   NYSE MKT

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE

 

 

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes   ¨     No   x

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes   ¨     No   x

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   x     No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes   x     No   ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in the definitive proxy statement or information statement incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨       Smaller reporting company   ¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   x

State the aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant. The aggregate market value is computed by reference to the price at which the common equity was sold as of June 30, 2014. $590,791,176.

Indicate the number of shares outstanding of each of the Registrant’s classes of common stock as of March 1, 2015.

Common Shares, without par value— 26,260,543

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the 2014 Annual Report to Shareholders incorporated by reference into Part II (Items 5-9A).

Portions of Notice of 2015 Annual Meeting of Shareholders and related Proxy Statement incorporated by reference into Part III (Items 10-14).

 

 

 


PART I

 

ITEM 1. BUSINESS

The Gorman-Rupp Company (“Registrant”, “Gorman-Rupp” or the “Company”) was incorporated in Ohio in 1934. The Company designs, manufactures and globally sells pumps and pump systems for use in water, wastewater, construction, dewatering, industrial, petroleum, original equipment, agriculture, fire protection, heating, ventilating and air conditioning (“HVAC”), military and other liquid-handling applications.

PRODUCTS

The Company operates in one business segment, the manufacture and international sale of pumps and pump systems. The following table sets forth, for the years 2012 through 2014, the total net sales, income before income taxes and year-end total assets (in thousands) of the Company.

 

     2014      2013      2012  

Net Sales

   $ 434,925       $ 391,665       $ 375,691   

Income Before Income Taxes

     53,734         44,277         42,447   

Total Assets

     380,904         355,638         335,183   

The Company’s product line consists of pump models ranging in size from  1 / 4 ” to nearly 15 feet and ranging in rated capacity from less than one gallon per minute to nearly one million gallons per minute. The types of pumps which the Company produces include self-priming centrifugal, standard centrifugal, magnetic drive centrifugal, axial and mixed flow, vertical turbine line shaft, submersible, high pressure booster, rotary gear, diaphragm, bellows and oscillating.

The pumps have drives that range from 1/35 horsepower electric motors up to much larger electric motors or internal combustion engines capable of producing several thousand horsepower. Many of the larger units comprise encased, fully integrated water and wastewater pumping stations. In certain cases, units are designed for the inclusion of customer-supplied drives.

The Company’s larger pumps are sold principally for use in the construction, industrial, water and wastewater handling fields; for flood control; for boosting low residential water pressure; for pumping refined petroleum products, including the ground refueling of aircraft; for fluid control in HVAC applications; and for various agricultural purposes.

The Company’s pumps are also utilized for dewatering purposes. Additionally, pumps manufactured for fire protection are used for sprinkler back-up systems, fire hydrants, stand pipes, fog systems and deluge systems at hotels, banks, factories, airports, schools, public buildings and hundreds of other types of facilities throughout the world.

Many of the Company’s smallest pumps are sold to customers for incorporation into such products as food processing, chemical processing, photo processing, medical and other waste treatment, HVAC equipment, appliances and solar heating.

MARKETING

The Company’s pumps are marketed in the United States and worldwide through a network of more than 1,000 distributors, through manufacturers’ representatives (for sales to many original equipment manufacturers), through third-party distributor catalogs, and by direct sales. The Company is continuously seeking alliances to further enhance marketing opportunities. Government sales are handled directly by the Company and export sales are made primarily through foreign distributors and representatives.

During 2014, 2013 and 2012, there were no shipments to any single customer that exceeded 10% of total net sales.

Gorman-Rupp continues to actively pursue international business opportunities and, in 2014, shipped its pumps to nearly 150 countries around the world. However, we believe that the Company’s foreign operations do not involve material financial or other risks due to their relatively small size, both individually and collectively. No sales made to customers in any one foreign country amounted to more than 5% of total net sales during 2014, 2013 or 2012.

 

1


PART I – CONTINUED

 

ITEM 1. BUSINESS – CONTINUED

 

As a result of our active pursuit of international business, approximately $136.6 million of 2014 sales were shipped outside the United States, as compared to $134.6 million in 2013 and $136.5 million in 2012. International sales represented 31%, 34% and 36% of total sales in 2014, 2013 and 2012, respectively. The Company continues its efforts to penetrate international markets principally by its increased global investments and its sales responses to worldwide pumping needs.

COMPETITION

Since the late 1990’s, a number of consolidations have occurred within the highly competitive pump industry. As a consequence, numerous pump competitors now exist as subsidiaries, divisions or departments within significantly larger corporations. Foreign-sourced pumps have also increasingly penetrated into most of the Company’s domestic markets.

Gorman-Rupp estimates that approximately 80 other domestic and global companies selling pumps and pump units compete in one or more of the lines of business and applications in which comparable products of the Company are utilized. International competitors are based mostly in Europe and Asia.

Most commercial and industrial pumps are specifically designed and engineered for a particular customer’s application. The Company believes that proper application, product performance, and quality of delivery and service are its principal methods of competition, and attributes its success to its continued emphasis in these areas.

PURCHASING AND PRODUCTION

Virtually all materials, supplies, components and accessories used by the Company in the fabrication of its products, including all castings (for which most patterns are made and owned by the Company), structural steel, bar stock, motors, solenoids, engines, seals, and plastic and elastomeric components are purchased by the Company from other suppliers and manufacturers. No purchases are made under long-term contracts and the Company is not dependent upon a single source for any materials, supplies, components or accessories which are of material importance to its business.

The Company purchases motors for its polypropylene bellows pumps and magnetic drive pumps from several alternative vendors; and motor components for its large submersible pumps, and motors and engines for its pump systems, are purchased from a limited number of suppliers. Small motor requirements are also currently sourced from alternative suppliers.

The other production operations of the Company consist of the machining of castings, the cutting, shaping and welding of bar stock and structural members, the design and assembly of electrical control panels, the manufacture of a few minor components, and the assembling, painting and testing of its products. Virtually all of the Company’s products are tested prior to shipment.

OTHER ASPECTS

As of December 31, 2014, the Company employed approximately 1,247 persons, of whom approximately 744 were hourly employees. The Company has no collective bargaining agreements, has never experienced a work stoppage and considers its labor relations to be satisfactory.

Although the Company owns a number of patents, and several of them are important to its business, Gorman-Rupp believes that the business of the Company is not materially dependent upon any one or more patents. The Company’s patents, trademarks and other intellectual property are adequate for its business purposes.

The backlog of orders at December 31, 2014 was valued at $160.7 million compared to $182.2 million at December 31, 2013. Approximately 95% of the Company’s backlog of unfilled orders is scheduled to be shipped during 2015, with the remainder principally during the first half of 2016. The decrease in backlog from a year ago reflects record shipments, including $11.7 million of shipments for the Permanent Canal Closures & Pumps (“PCCP”) project to supply major flood control pumps to a member of a joint venture construction group for a significant New Orleans flood control project.

 

2


PART I – CONTINUED

 

ITEM 1. BUSINESS – CONTINUED

 

Approximately $43.2 million of the project remain in the December 31, 2014 backlog total. The PCCP project is a fixed-price contract and full government funding has been appropriated for the project. The termination, cancellation and delay provisions within the PCCP project contract are governed by provisions of the Federal Acquisition Regulation (“FAR”), principally by clauses 52.222-12 (Contract Termination-Debarment), 52.242-14 (Suspension of Work), 52.242-2 Alt. 1 (Production Progress Reports), and 52.249.10 (Default – Fixed-Price Construction).

AVAILABLE INFORMATION

The Company maintains a website accessible through its internet address of www.gormanrupp.com . Gorman-Rupp makes available free of charge on or through www.gormanrupp.com its Annual Report to Shareholders, its annual reports on Form 10-K, its quarterly reports on Form 10-Q, and its current reports on Form 8-K, and any amendments to those reports, as soon as reasonably practicable after those reports (and any amendments) are electronically filed with or furnished to the Securities and Exchange Commission (“Commission”). However, the information contained on the Company’s website is not a part of this Form 10-K or any other report filed with or furnished to the Commission.

As noted in Gorman-Rupp’s Annual Report to Shareholders, a paper copy of the Company’s Form 10-K is also available free of charge upon written request to the Company’s Corporate Secretary.

 

ITEM 1A. RISK FACTORS

Continuation of current and projected future business environment

The overall pump industry is cyclical in nature, and some of its business activity is related to general business conditions in the durable goods and capital equipment markets. Demand for most of the Company’s products and services is affected by the level of new capital investment and planned maintenance expenditures by its customers. The level of such expenditures by our customers depends, in turn, on general economic conditions, availability of credit, economic conditions within their respective industries and expectations of future market behavior. Also, volatility in commodity prices such as oil and agricultural products can negatively affect the level of these activities and can result in postponement of capital spending decisions or the delay or cancellation of existing orders. Additionally, raw material and energy are substantive drivers of costs in the manufacture of pumps and changes of these costs are often unpredictable. While efforts are made to recoup higher production costs through increased prices, the future acceptability of such price increases by customers is not guaranteed due to the highly competitive market place.

Compliance with, and costs related to, a variety of import and export laws and regulations

The Company is subject to a variety of laws regarding international operations, including regulations issued by the U.S. Department of Commerce Bureau of Industry and Security and various foreign governmental agencies. Actual or alleged violations of import-export laws could result in enforcement actions and financial penalties. The Company cannot predict the nature, scope or effect of future regulatory requirements to which our international operations and trading practices might be subject or the manner in which existing laws might be administered or interpreted. Future regulations could limit the countries in which certain of our products may be manufactured or sold or could restrict our access to, and increase the cost of obtaining, products from foreign sources.

International operations exposure to fluctuations in foreign currency exchange rates

Approximately 10% of the Company’s revenue and certain of its costs, assets and liabilities, are denominated in currencies other than the U.S. dollar. The primary currencies to which the Company has exposure are the Canadian Dollar, the Euro and the South African Rand. Devaluations of these currencies can reduce the value of the Company’s local monetary assets, reduce the U.S. dollar value of its local cash flow, and generate local currency losses that may reduce the U.S. dollar value

 

3


PART I – CONTINUED

 

ITEM 1A. RISK FACTORS – CONTINUED

 

of future local net income. Historically these exchange rate fluctuations have not materially affected our financial condition, results of operations or cash flows.

Environmental compliance costs and liabilities

The Company’s operations and properties are subject to numerous, and increasing, domestic and foreign environmental laws and regulations which can impose operating and financial sanctions for violations. Moreover, environmental and sustainability initiatives, practices, rules and regulations are under increasing scrutiny of both governmental and non-governmental bodies and may require changes in operational practices, standards and expectations and in turn increase the Company’s compliance costs. Periodically, the Company has incurred, and expects to continue to incur, operating and capital costs to comply with environmental requirements. The Company monitors its environmental responsibilities, together with trends in the related laws, and believes it is in substantial compliance with current regulations. The Company believes that reasonably anticipated future environmental compliance expenditures will not have a material adverse effect on our financial condition, results of operations or cash flows.

Defined benefit pension plan settlement expense

The Company sponsors a defined benefit pension plan covering most domestic employees and accrues amounts for funding of its obligations under the plan. The defined benefit pension plan allows eligible retiring employees to receive a lump-sum distribution for benefits earned in lieu of annual payments and most retirees elect this option. Under applicable accounting rules, if the lump-sum distributions made for a plan year exceed an actuarially-determined threshold of the total of the service cost and interest cost for the plan year, the Company at such point would need to recognize for that year’s results of operations a settlement expense for the resulting unrecognized actuarial loss. The Company has been required to make such adjustments in some prior years and, if such non-cash adjustments are necessary in future periods, they may be comparably adverse to the Company’s operating results.

Family ownership of common equity

A substantial percentage of the Company’s Common Shares is held by various members of the Gorman and Rupp families and their affiliates. These family holdings do not typically trade; therefore, the Common Shares, in part because of these circumstances, generally have a history of relatively low volume trading experiences on the NYSE MKT Exchange.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

 

ITEM 2. PROPERTIES

The Company’s corporate headquarters are located in Mansfield, Ohio. The production operations of the Company are conducted at several locations throughout the United States and other countries as set forth below. The Company is a lessee under a number of operating leases for certain real properties, none of which is material to its operations.

The Company owns facilities in Sparks, Nevada and Dallas, Texas comprising training centers and warehouses, and leases a warehouse and training facility in Bangkok, Thailand. In addition, the Company leases warehouse facilities in Jebal Ali, Dubai and Leeuwarden, The Netherlands.

 

5


PART I – CONTINUED

 

ITEM 2. PROPERTIES

The Company’s principal production operations are:

 

United States      
Mansfield (two) and Bellville, Ohio    Glendale, Arizona    Houston, Texas** (three)
Toccoa, Georgia    Olive Branch, Mississippi    Lubbock, Texas
Royersford, Pennsylvania    Baton Rouge, Louisiana*   
Other Countries      
St. Thomas, Ontario, Canada    County Westmeath, Ireland*    Leeuwarden, The Netherlands*
Culemborg, The Netherlands*    Johannesburg, South Africa*   

 

* Leased properties
** One leased

Gorman-Rupp considers its plants, machinery and equipment to be well maintained, in good operating condition and adequate for the present uses and business requirements of the Company.

 

ITEM 3. LEGAL PROCEEDINGS

For more than ten years, numerous business entities in the pump and fluid-handling industries, as well as a multitude of companies in many other industries, have been targeted in a series of lawsuits in several jurisdictions by various individuals seeking redress to claimed injury as a result of the entities’ alleged use of asbestos in their products. The Company and one of its subsidiaries remain drawn into this mass-scaled litigation, typically as one of many co-defendants in a particular proceeding; the majority of these cases are against Patterson Pump Company. The allegations in the lawsuits involving the Company and/or Patterson Pumps Company are vague, general and speculative, and most cases have not advanced beyond the early stage of discovery. Insurers of the Company have engaged legal counsel to represent the Company and its subsidiaries and to protect their interests. In certain situations, the plaintiffs have voluntarily dismissed the Company and/or Patterson Pump Company from some of the lawsuits after the plaintiffs have acknowledged that there is no basis for their claims. In other situations, the Company and/or Patterson Pump Company have been dismissed from some of the lawsuits as a result of court rulings in favor of motions to dismiss and/or motions for summary judgment. In one hundred cases the Company has entered into nominal economic settlements recommended for payment by its insurers, coupled with dismissal of the lawsuits.

In addition, the Company and/or its subsidiaries are parties in a small number of legal proceedings arising in the ordinary course of business. Management does not currently believe that these proceedings, or the industry-wide asbestos litigation, will materially impact the Company’s consolidated results of operations, liquidity or financial condition.

 

5


PART I – CONTINUED

 

ITEM 4. MINE SAFETY DISCLOSURE

Not applicable.

EXECUTIVE OFFICERS OF THE REGISTRANT

Pursuant to General Instruction G(3), the information regarding executive officers called for by Item 401 of Regulation S-K and by Item 10 of this Form 10-K is set forth below.

 

Name

   Age     

Office

  

Date Elected to Executive

Officer Position

James C. Gorman

     90       Chairman    1989

Jeffrey S. Gorman

     62       President and Chief Executive Officer    1998

Wayne L. Knabel

     68       Executive Vice President, Chief Financial Officer and Treasurer    2009

Brigette A. Burnell

     39       Corporate Counsel and Corporate Secretary    2014

Except as noted, each of the above-named officers has held his or her executive position with the Company for the past five years. Mr. J. C. Gorman served as the Company’s President from 1964 until 1989, and as Chief Executive Officer from 1964 until 1996. He has served as a Director of the Company continuously since 1946. Mr. J. S. Gorman was elected President and Chief Executive Officer effective May 1, 1998, after having served as Senior Vice President since 1996. Mr. J. S. Gorman also held the position of General Manager of the Mansfield Division from 1989 through 2005. He served as Assistant General Manager from 1986 to 1988; and he held the office of Corporate Secretary from 1982 to 1990. He has served as a Director of the Company continuously since 1989. Mr. Knabel was elected Executive Vice President effective May 1, 2014 and was elected Chief Financial Officer and Treasurer effective May 1, 2009. Mr. Knabel previously served as Vice President Finance since May 1, 2008. Mr. Knabel joined the Company in March 2008. Ms. Burnell joined the Company as Corporate Attorney on January 2, 2014, and was elected as Corporate Counsel and Secretary effective May 1, 2014. Ms. Burnell previously served as Corporate Counsel of Red Capital Group from 2011 to 2013 advising the company on legal matters in all areas of business, after having served as an Associate at Jones Day from 2002 to 2011. Mr. J. S. Gorman is the son of Mr. J. C. Gorman. There are no other family relationships among any of the Executive Officers and Directors of the Company.

 

6


PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Attention is directed to the section “Quarterly Stock Prices and Dividends” and the data below pertaining to the shareholder information on page 42 in the Company’s 2014 Annual Report to Shareholders, which is incorporated herein by this reference.

Attention is also directed to the “Shareholder Return Performance Presentation” on page 42 in the Company’s 2014 Annual Report to Shareholders, which is incorporated herein by this reference.

The Company did not repurchase any of its Common Shares during the fourth quarter of the period covered by this Form 10-K.

 

ITEM 6. SELECTED FINANCIAL DATA

Attention is directed to the section “Eleven Year Summary of Selected Financial Data” on pages 40 and 41 in the Company’s 2014 Annual Report to Shareholders, which is incorporated herein by this reference.

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Attention is directed to the section “Management’s Discussion and Analysis” on pages 30 through 37, and to the section “Safe Harbor Statement” on page 43, in the Company’s 2014 Annual Report to Shareholders, which are incorporated herein by this reference.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Attention is directed to the section “Management’s Discussion and Analysis” on pages 30 through 37, and to the section “Safe Harbor Statement” on page 43, in the Company’s 2014 Annual Report to Shareholders, which are incorporated herein by this reference. As indicated in paragraph 10 on page 1 referenced above, the Company has no material market risk exposures required to be reported by Item 305 of Regulation S-K.

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Attention is directed to the Company’s consolidated financial statements, the notes thereto and the report of the independent registered public accounting firm thereon on pages 16 through 29, and to the section “Summary of Quarterly Results of Operations” on pages 40 and 41, in the Company’s 2014 Annual Report to Shareholders, which are incorporated herein by this reference.

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

 

ITEM 9A. 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

 

7


PART II - CONTINUED

 

ITEM 9A. CONTROLS AND PROCEDURES – CONTINUED

 

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-K. Based on the evaluation, the principal executive officer and the principal financial officer have concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2014.

Management’s Report on Internal Control over Financial Reporting

There were no material weaknesses identified at any Division or Subsidiary of the Company during 2014. The 2014 Report of Management on Internal Control over Financial Reporting and the related Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting are incorporated herein by this reference from pages 38 and 39 of the Company’s 2014 Annual Report to Shareholders, respectively.

Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

ITEM 9B. OTHER INFORMATION

None.

PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Attention is directed to the sections “Election of Directors,” “Board of Directors and Board Committees,” “Audit Committee Report” and “Beneficial Ownership of Shares” in the Company’s definitive Notice of 2015 Annual Meeting of Shareholders and related Proxy Statement (filed with the SEC pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Form 10-K), which are incorporated herein by this reference.

With respect to Executive Officers, attention is directed to Part I of this Form 10-K.

The Company has adopted a Code of Ethics that applies to its Principal Executive Officer, Principal Financial Officer, , as well as to all employees, officers and Directors. The Code of Ethics is set forth as an exhibit to this Form 10-K. In addition, the Code of Ethics is posted on the Company’s website accessible through its Internet address of www.gormanrupp.com (under the heading “Investor Relations” and the sub-heading “Corporate Governance”), including any amendments.

 

ITEM 11. EXECUTIVE COMPENSATION

Attention is directed to the sections “Board of Directors and Board Committees,” “Executive Compensation,” “Compensation Discussion and Analysis,” “Pension Benefits,” “Summary Compensation Table,” “Non-Employee Director Compensation,” “Risk Oversight,” “Compensation Committee Interlocks and Insider Participation,” and “Compensation Committee Report” in the Company’s definitive Notice of 2015 Annual Meeting of Shareholders

 

8


PART III – CONTINUED

 

ITEM 11. EXECUTIVE COMPENSATION – CONTINUED

 

And related Proxy Statement (filed pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Form 10-K), which are incorporated herein by this reference.

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Attention is directed to the section “Beneficial Ownership of Shares” and “Election of Directors” in the Company’s definitive Notice of 2015 Annual Meeting of Shareholders and related Proxy Statement (filed with the SEC pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Form 10-K), which are incorporated herein by this reference.

On May 22, 1997, the Company’s Board of Directors adopted a Non-Employee Directors’ Compensation Plan, which was amended and restated on July 24, 2014 (the “Plan”). This Plan became effective without shareholder approval and constitutes the Company’s only equity compensation plan. The Plan provides for share compensation for regular services performed by each of the Company’s non-employee Directors. In addition to cash compensation, non-employee Directors receive an award of Common Shares (from the Company’s treasury) on each July 1. The Plan expires on the earliest of (i) May 21, 2017, (ii) at such time as all of the Company’s Common Shares authorized for award under the Plan and registered under Form S-8 Registration Statement No. 333-30159 shall have been awarded and issued, (iii) at such time as the Company deregisters any Common Shares not issued under the foregoing Registration Statement, or (iv) at such time as the Plan is terminated by action of the Board of Directors. The number of Common Shares which may be awarded under the Plan cannot exceed 50,000, subject to certain conditions (e.g., stock splits, stock dividends).

As of December 31, 2014, 65,500 Common Shares had been issued to non-employee Directors and 20,132 Common Shares remained available for future issuance (6,875 Common Shares were added as a result of the 5 for 4 stock split effective September 10, 2004; 7,093 Common Shares were added as a result of the 5 for 4 stock split effective December 8, 2006; 8,117 Common Shares were added as a result of the 5 for 4 stock split effective December 10, 2007; 8,021 were added as a result of the 5 for 4 stock split effective June 10, 2011; and 5,526 Common Shares were added as a result of the 5 for 4 stock split effective December 10, 2013). No options, warrants or rights are available for issuance under the Plan. Attention is directed to the sections “Board of Directors and Board Committees” and “Beneficial Ownership of Shares” in the Company’s definitive Notice of 2015 Annual Meeting of Shareholders and related Proxy Statement (filed with the SEC pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Form 10-K), which is incorporated herein by this reference.

 

9


PART III – CONTINUED

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS – CONTINUED

 

Plan Category

   Number
of securities to be
issued upon
exercise of
outstanding option
warrants and right
     Weighted average
exercise price of
outstanding options
warrants and rights
     Number of securities
remaining available to
future issuance
 

Non-Employee Directors’ Compensation plan ( not approved by Shareholders)

     -0-       $ -0-         20,132   

Equity compensation plans approved by shareholders

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total

     -0-       $ -0-         20,132   

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Attention is directed to the section “Board of Directors and Board Committees” and “Related Party Transactions” in the Company’s definitive Notice of 2015 Annual Meeting of Shareholders and related Proxy Statement (filed with the SEC pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Form 10-K), which is incorporated herein by this reference. The Company has no relationships or transactions required to be reported by Item 404 of Regulation S-K.

 

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Attention is directed to the section “Appointment of Independent Registered Public Accounting Firm” in the Company’s definitive Notice of 2015 Annual Meeting of Shareholders and related Proxy Statement (filed with the SEC pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Form 10-K), which is incorporated herein by this reference.

 

10


PART III – CONTINUED

 

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

The following documents are filed as part of this report:

1. Financial Statements

With respect to the audited consolidated financial statements of the Registrant and its subsidiaries, the following documents have been incorporated by reference into this report:

 

  (i.) Consolidated Statements of Income-Years ended December 31, 2014, 2013, 2012

 

  (ii.) Consolidated Statements of Comprehensive Income-Years ended December 31, 2014 , 2013 and 2012

 

  (iii.) Consolidated Balance Sheets-December 31, 2014 and 2013

 

  (iv.) Consolidated Statements of Equity-Years ended December 31, 2014, 2013 and 2012

 

  (v.) Consolidated Statements of Cash Flows-Years ended December 31, 2014, 2013 and 2012

 

  (vi.) Notes to Consolidated Financial Statements

 

  (vii.) 2014 Report of Independent Registered Public Accounting Firm

 

  (viii.) 2014 Report of Management on Internal Control Over Financial Reporting as of December 31, 2014

 

  (ix.) 2014 Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting as of December 31, 2014

2. Financial Statement Schedules

All financial statement schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, or the information required to be set forth therein is included in the consolidated financial statements or Notes thereto.

 

11


PART III – CONTINUED

 

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES – CONTINUED

3. Exhibits

The exhibits listed below are submitted in a separate section of this report immediately following the Exhibit Index.

 

    (3)   (i) Articles of incorporation and (ii) By-laws
    (4)   Instruments defining the rights of security holders, including indentures
    (10)   Material contracts
    (13)   Annual report to security holders
    (14)   Code of ethics
    (21)   Subsidiaries of the registrant
    (23)   Consent of Independent Registered Public Accounting Firm
    (24)   Powers of attorney
    (31)   Rule 13a-14(a)/15d-14(a) Certifications
    (32)   Section 1350 Certifications
    (101.INS)   XBRL Instance Document
    (101.SCH)   XBRL Taxonomy Extension Schema Document
    (101.CAL)   XBRL Taxonomy Extension Calculation Linkbase Document
    (101.DEF)   XBRL Taxonomy Extension Definition Linkbase Document
    (101.LAB)   XBRL Taxonomy Extension Label Linkbase Document
    (101.PRE)   XBRL Taxonomy Extension Presentation Linkbase Document

 

12


SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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
*By:   /s/ BRIGETTE A. BURNELL
  Brigette A. Burnell
  Attorney-In-Fact

Date: March 9, 2015

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.

 

*JEFFREY S. GORMAN

      President and Chief Executive Officer and Director
Jeffrey S. Gorman       (Principal Executive Officer)

*WAYNE L. KNABEL

      Chief Financial Officer
Wayne L. Knabel       (Principal Financial and Accounting Officer)

*JAMES C. GORMAN

      Director
James C. Gorman      

*M. ANN HARLAN

      Director
M. Ann Harlan      

*THOMAS E. HOAGLIN

      Director
Thomas E. Hoaglin      

*CHRISTOPHER H. LAKE

      Director
Christopher H. Lake      

*KENNETH R. REYNOLDS

      Director
Kenneth R. Reynolds      

*RICK R. TAYLOR

      Director
Rick R. Taylor      

*W. WAYNE WALSTON

      Director
W. Wayne Walston      

 

* The undersigned, by signing her name hereto, does sign and execute this Annual Report on Form 10-K on behalf of The Gorman-Rupp Company and on behalf of each of the above-named Officers and Directors of The Gorman-Rupp Company pursuant to Powers of Attorney executed by The Gorman-Rupp Company and by each such Officer and Director and filed with the Securities and Exchange Commission.

March 9, 2015

 

By:   /s/ BRIGETTE A. BURNELL
  Brigette A. Burnell
  Attorney-In-Fact

 

13


ANNUAL REPORT ON FORM 10-K

THE GORMAN-RUPP COMPANY

For the Year Ended December 31, 2014

EXHIBIT INDEX

 

Exhibit

Number

 

Description

(3)(4)   Amended Articles of Incorporation, as amended*
(3)(4)   Regulations*
(10)(a)   Form of Indemnification Agreement between the Company and its Directors
(10)(b)   Form of Indemnification Agreement between the Company and its Officers
(10)(c)   Amended and Restated Non-Employee Directors’ Compensation Plan***
(13)   Incorporated Portions of 2014 Annual Report to Shareholders
(14)   Code of Ethics
(21)   Subsidiaries of the Company
(23)   Consent of Independent Registered Public Accounting Firm
(24)   Powers of Attorney
(31) (a)   Certification of Chief Executive Officer (Section 302 of the Sarbanes-Oxley Act of 2002)
(31) (b)   Certification of Chief Financial Officer (Section 302 of the Sarbanes-Oxley Act of 2002)
(32)   Certification Pursuant to 18 U. S. C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(101.INS)   XBRL Instance Document
(101.SCH)   XBRL Taxonomy Extension Schema Document
(101.CAL)   XBRL Taxonomy Extension Calculation Linkbase Document
(101.DEF)   XBRL Taxonomy Extension Definition Linkbase Document
(101.LAB)   XBRL Taxonomy Extension Label Linkbase Document
(101.PRE)   XBRL Taxonomy Extension Presentation Linkbase Document

 

* Incorporated herein by this reference from Exhibit (3) (4) of the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.
** Incorporated herein by this reference from Exhibit (10) (1) of the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2014.

 

14

Exhibit 10(a)

DIRECTOR INDEMNIFICATION AGREEMENT

This Director Indemnification Agreement, dated as of July 24, 2014 (this “Agreement”), is made by and between The Gorman-Rupp Company, an Ohio corporation (the “Company”), and «First_Name»«Last_Name» (“Indemnitee”).

RECITALS:

A. Both the Company and the Indemnitee recognize that recent federal legislation and rules adopted by the Securities and Exchange Commission and the national securities exchanges have imposed additional disclosure and corporate governance obligations on directors and officers of public companies and have exposed such directors and officers to the increased risk of litigation and other claims being asserted against them.

B. The Company’s Board of Directors (the “Board”) has determined that enhancing the ability of the Company to retain and attract as directors and officers the most capable persons is in the best interests of the Company and that the Company therefore should seek to assure such persons that indemnification and insurance coverage is available.

C. Indemnitee is a «And_Officer» of the Company and Indemnitee’s willingness to serve in such «Capacity_ies» is predicated, in substantial part, upon the Company’s willingness to indemnify Indemnitee in accordance with the principles reflected above, to the fullest extent permitted by the laws of the state of Ohio, and upon the other undertakings set forth in this Agreement.

D. Therefore, in recognition of the need to provide Indemnitee with substantial protection against personal liability, in order to procure Indemnitee’s continued service as a «And_Officer» of the Company and to enhance Indemnitee’s ability to serve the Company in an effective manner, and in order to provide such protection pursuant to express contract rights (intended to be enforceable irrespective of, among other things, any amendment to the Company’s Articles of Incorporation or Code of Regulations (collectively, the “Constituent Documents”), any change in the composition of the Board or any change-in-control or business combination transaction relating to the Company), the Company wishes to provide in this Agreement for the indemnification of, and the advancement of Expenses (as defined in Section 1(g)), to Indemnitee as set forth in this Agreement and for the continued coverage of Indemnitee under the Company’s directors’ and officers’ liability insurance policies.

AGREEMENT:

NOW, THEREFORE, the parties hereby agree as follows:

1. Certain Definitions . In addition to terms defined elsewhere herein, the following terms have the following meanings when used in this Agreement with initial capital letters:

(a) “Change in Control” means the occurrence after the date of this Agreement of any of the following events:


(i) the acquisition by any individual, entity or group (within the meaning of Sections 13(d)(3) or 14(d)(2) of the Exchange Act) (a “Person”) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 30% or more of the combined voting power of the then-outstanding Voting Stock of the Company unless the change in relative beneficial ownership of such Person results solely from a reduction in the aggregate number of outstanding shares of Voting Stock of the Company; provided , however , that, for purposes of this Section 1(a)(i), the following acquisitions shall not constitute a Change in Control: (1) any acquisition of Voting Stock of the Company directly from the Company that is approved by a majority of the Incumbent Directors, (2) any acquisition of Voting Stock of the Company by the Company or any Subsidiary, (3) any acquisition of Voting Stock of the Company by any employee benefit plan (or related trust) sponsored or maintained by the Company or any Subsidiary, and (4) any acquisition of Voting Stock of the Company by any Excepted Person; or

(ii) a majority of the Directors are not Incumbent Directors; or

(iii) the consummation of a reorganization, merger or consolidation, unless immediately following such reorganization, merger or consolidation, all of the individuals and entities who were the beneficial owners of Voting Stock of the Company immediately prior to such transaction beneficially own, directly or indirectly, more than 51% of the combined voting power of the then outstanding shares of Voting Stock of the entity resulting from such transaction; or

(iv) approval by the shareholders of the Company of a complete liquidation or dissolution of the Company, or sale or other disposition of all or substantially all of the assets of the Company.

(b) “Claim” means (i) any threatened, asserted, pending or completed claim, demand, action, suit or proceeding, whether civil, criminal, administrative, arbitrative, investigative or other, and whether made pursuant to federal, state or other law; and (ii) any threatened, pending or completed inquiry or investigation, whether made, instituted or conducted by the Company or any other person, including any federal, state or other governmental entity, that Indemnitee determines might lead to the institution of any such claim, demand, action, suit or proceeding.

(c) “Controlled Affiliate” means any corporation, limited liability company, partnership, joint venture, trust or other entity or enterprise, whether or not for profit, that is directly or indirectly controlled by the Company. For purposes of this definition, “control” means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of an entity or enterprise, whether through the ownership of voting securities, through other voting rights, by contract or otherwise; provided that direct or indirect beneficial ownership of capital stock or other interests in an entity or enterprise entitling the holder to cast 20% or more of the total number of votes generally entitled to be cast in the election of directors (or persons performing comparable functions) of such entity or enterprise shall be deemed to constitute control for purposes of this definition.

(d) “Disinterested Director” means a director of the Company who is not and was not a party to the Claim in respect of which indemnification is sought by Indemnitee.


(e) “Excepted Persons” means any one or more of the following: (i) James C. Gorman or any affiliate of James C. Gorman, (ii) any spouse, sibling or lineal descendant of James C. Gorman, or any of their spouses, siblings or lineal descendants, or (iii) any trust, corporation or other entity set up for the primary benefit of, or majority owned or otherwise controlled by, any of the persons or entities described in the foregoing clauses (i) or (ii).

(f) “Exchange Act” shall mean the Securities Exchange Act of 1934, as amended.

(g) “Expenses” means reasonable attorneys’ and experts’ fees and expenses and all other reasonable costs and expenses paid or payable in connection with investigating, defending, being a witness in or participating in (including on appeal), or preparing to investigate, defend, be a witness in or participate in (including on appeal), any Claim.

(h) “Incumbent Directors” means the individuals who, as of the date hereof, are Directors of the Company and any individual becoming a Director subsequent to the date hereof whose election, nomination for election by the Company’s shareholders, or appointment, was approved by a vote of at least two-thirds of the then Incumbent Directors.

(i) “Indemnifiable Claim” means any Claim based upon, arising out of or resulting from (i) any actual, alleged or suspected act or failure to act, whether before, on or after the date of this Agreement, by Indemnitee in his or her capacity as a director, officer, employee or agent of the Company or as a director, officer, employee, member, manager, trustee or agent of any other corporation, limited liability company, partnership, joint venture, trust or other entity or enterprise, whether or not for profit, as to which Indemnitee is or was serving at the request of the Company as a director, officer, employee, member, manager, trustee or agent, (ii) any actual, alleged or suspected act or failure to act, whether before, on or after the date of this Agreement, by Indemnitee in respect of any business, transaction, communication, filing, disclosure or other activity of the Company or any other entity or enterprise referred to in clause (i) of this sentence, or (iii) Indemnitee’s status as a current or former director, officer, employee or agent of the Company or as a current or former director, officer, employee, member, manager, trustee or agent of the Company or any other entity or enterprise referred to in clause (i) of this sentence or any actual, alleged or suspected act or failure to act by Indemnitee in connection with any obligation or restriction imposed upon Indemnitee by reason of such status. In addition to any service at the actual request of the Company, for purposes of this Agreement, Indemnitee shall be deemed to be serving or to have served at the request of the Company as a director, officer, employee, member, manager, trustee or agent of another entity or enterprise if Indemnitee is or was serving as a director, officer, employee, member, manager, trustee or agent of such entity or enterprise and (i) such entity or enterprise is or at the time of such service was a Controlled Affiliate, (ii) such entity or enterprise is or at the time of such service was an employee benefit plan (or related trust) sponsored or maintained by the Company or a Controlled Affiliate, or (iii) the Company or a Controlled Affiliate directly or indirectly caused or authorized Indemnitee to be nominated, elected, appointed, designated, employed, engaged or selected to serve in such capacity.

(j) “Indemnifiable Losses” means any and all Losses relating to, arising out of or resulting from any Indemnifiable Claim.


(k) “Independent Counsel” means a law firm, or a member of a law firm, that is experienced in matters of corporation law and neither presently is, nor in the past five years has been, retained to represent: (i) the Company (or any Subsidiary) or Indemnitee (or any immediate family member of Indemnitee) in any matter material to either such party (other than with respect to matters concerning the Indemnitee under this Agreement, or of other indemnitees under similar indemnification agreements), or (ii) any other named (or, as to a threatened matter, reasonably likely to be named) party to the Indemnifiable Claim giving rise to a claim for indemnification hereunder. Notwithstanding the foregoing, the term “Independent Counsel” shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or Indemnitee in an action to determine Indemnitee’s rights under this Agreement.

(l) “Losses” means any and all Expenses, damages, losses, liabilities, judgments, fines, penalties (whether civil, criminal or other) and amounts paid in settlement, including all interest, assessments and other charges paid or payable in connection with or in respect of any of the foregoing.

(m) “ORC” means the Ohio Revised Code.

(n) “Subsidiary” means an entity in which the Company directly or indirectly beneficially owns 50% or more of the outstanding Voting Stock.

(o) “Voting Stock” means securities entitled to vote generally in the election of directors (or similar governing bodies).

2. Indemnification Obligation . Subject to Section 7, the Company shall indemnify, defend and hold harmless Indemnitee, to the fullest extent permitted or required by the laws of the State of Ohio in effect on the date hereof or as such laws may from time to time hereafter be amended to increase the scope of such permitted indemnification, against any and all Indemnifiable Claims and Indemnifiable Losses. Notwithstanding the foregoing, Indemnitee shall not be entitled to indemnification pursuant to this Agreement:

(a) in connection with any Claim initiated by Indemnitee against the Company or any director or officer of the Company (i) unless the Company has joined in or consented to the initiation of such Claim or (ii) except for a Claim initiated by Indemnitee pursuant to Section 4 or Section 20, in which case Indemnitee shall be entitled to indemnification to the extent set forth in Section 4 or Section 20, as the case may be;

(b) if a final decision by a court of competent jurisdiction determines that such indemnification is prohibited by applicable law;

(c) for the disgorgement of profits arising from the purchase or sale by Indemnitee of securities of the Company in violation of Section 16(b) of the Exchange Act; or

(d) for Indemnitee’s reimbursement to the Company of any bonus or other incentive-based or equity-based compensation previously received by Indemnitee or payment of any profits realized by Indemnitee from the sale of securities of the Company, as required in each case under the Exchange Act, any applicable rules or regulations promulgated by the Securities


and Exchange Commission or any national securities exchange or national securities association on which the Company’s securities may be traded, and any Company policy adopted pursuant to such law, rules or regulations.

3. Advancement of Expenses . Indemnitee shall have the right to advancement by the Company, prior to the final disposition of any Indemnifiable Claim, of any and all Expenses relating to, arising out of or resulting from any Indemnifiable Claim actually and reasonably paid or incurred by Indemnitee. Indemnitee’s right to such advancement is not subject to the satisfaction of any standard of conduct. Without limiting the generality or effect of the foregoing, within five business days after any request by Indemnitee, the Company shall, in accordance with such request (but without duplication), (a) pay such Expenses on behalf of Indemnitee, (b) advance to Indemnitee funds in an amount sufficient to pay such Expenses, or (c) reimburse Indemnitee for such Expenses; provided that Indemnitee shall repay, without interest any amounts actually advanced to Indemnitee that, at the final disposition of the Indemnifiable Claim to which the advance related, were in excess of amounts paid or payable by Indemnitee in respect of Expenses relating to, arising out of or resulting from such Indemnifiable Claim. For purposes of obtaining payments of Expenses in advance of final disposition, the Indemnitee shall submit to the Company a sworn request for advancement of Expenses substantially in the form of Exhibit A attached hereto and made a part hereof (subject to Indemnitee filling in the blanks therein and selecting from among the bracketed alternatives therein, the “Undertaking”), averring that the Indemnitee has reasonably incurred or will reasonably incur actual Expenses in defending an Indemnifiable Claim. The Undertaking need not be secured and the Company must accept the Undertaking without reference to Indemnitee’s ability to repay the Expenses. Unless at the time of the Indemnitee’s act or omission at issue, the Constituent Documents prohibit such advances by specific reference to ORC Section 1701.13(E)(5)(a) or unless the only liability asserted against the Indemnitee in the subject action, suit or proceeding is pursuant to ORC Section 1701.95, the Indemnitee shall be eligible to execute Part A of the Undertaking by which the Indemnitee undertakes to: (i) repay such amount if it is proved by clear and convincing evidence in a court of competent jurisdiction that the Indemnitee’s action or failure to act involved an act or omission undertaken with deliberate intent to cause injury to the Company or undertaken with reckless disregard for the best interests of the Company; and (ii) reasonably cooperate with the Company concerning the action, suit, proceeding or claim. In all cases, the Indemnitee shall be eligible to execute Part B of the Undertaking by which the Indemnitee undertakes to repay such amount if it ultimately is determined that the Indemnitee is not entitled to be indemnified by the Company under this Agreement or otherwise. In the event that the Indemnitee is eligible to and does execute both Part A and Part B of the Undertaking, the Expenses which are paid by the Company pursuant thereto shall be required to be repaid by the Indemnitee only if the Indemnitee is required to do so under the terms of both Part A and Part B of the Undertaking. In no event shall Indemnitee’s right to the payment, advancement or reimbursement of Expenses pursuant to this Section 3 be conditioned upon any undertaking that is less favorable to Indemnitee than, or that is in addition to, the undertakings set forth in Exhibit A .

4. Indemnification for Additional Expenses . Without limiting the generality or effect of the foregoing, the Company shall indemnify and hold harmless Indemnitee against and, if requested by Indemnitee, shall reimburse Indemnitee for, or advance to Indemnitee, within five business days of such request, any and all Expenses actually and reasonably paid or incurred by


Indemnitee in connection with any Claim made, instituted or conducted by Indemnitee for (a) indemnification or payment, advancement or reimbursement of Expenses by the Company under any provision of this Agreement, or under any other agreement or provision of the Constituent Documents now or hereafter in effect relating to Indemnifiable Claims, and/or (b) recovery under any directors’ and officers’ liability insurance policies maintained by the Company, regardless in each case of whether Indemnitee ultimately is determined to be entitled to such indemnification, reimbursement, advance or insurance recovery, as the case may be; provided , however , that Indemnitee shall return, without interest, any such advance of Expenses (or portion thereof) which remains unspent at the final disposition of the Claim to which the advance related.

5. Partial Indemnity . If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of any Indemnifiable Loss, but not for all of the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion thereof to which Indemnitee is entitled.

6. Procedure for Notification . To obtain indemnification under this Agreement in respect of an Indemnifiable Claim or Indemnifiable Loss, Indemnitee shall submit to the Company a written request, including a brief description (based upon information then available to Indemnitee) of such Indemnifiable Claim or Indemnifiable Loss. If, at the time of the receipt of such request, the Company has directors’ and officers’ liability insurance in effect under which coverage for such Indemnifiable Claim or Indemnifiable Loss is reasonably likely to be available, the Company shall give prompt written notice of such Indemnifiable Claim or Indemnifiable Loss to the applicable insurers in accordance with the procedures set forth in the applicable policies. The Company shall provide to Indemnitee a copy of such notice delivered to the applicable insurers, and copies of all subsequent correspondence between the Company and such insurers regarding the Indemnifiable Claim or Indemnifiable Loss, in each case substantially concurrently with the delivery or receipt thereof by the Company. The failure by Indemnitee to timely notify the Company of any Indemnifiable Claim or Indemnifiable Loss shall not relieve the Company from any liability hereunder unless, and only to the extent that, the Company did not otherwise learn of such Indemnifiable Claim or Indemnifiable Loss and such failure results in forfeiture by the Company of substantial defenses, rights or insurance coverage.

7. Determination of Right to Indemnification .

(a) To the extent that Indemnitee shall have been successful on the merits or otherwise in defense of any Indemnifiable Claim or any portion thereof or in defense of any issue or matter therein, including dismissal without prejudice, Indemnitee shall be indemnified against all Indemnifiable Losses relating to, arising out of or resulting from such Indemnifiable Claim in accordance with Section 2 and no Standard of Conduct Determination (as defined in Section 7(b)) shall be required. In the event that a matter as to which there has been a dismissal without prejudice is later revived in the same or similar form, that matter will be treated as a new Claim for all purposes of this Agreement.

(b) To the extent that the provisions of Section 7(a) are inapplicable to an Indemnifiable Claim that shall have been finally disposed of, any determination of whether Indemnitee has satisfied any applicable standard of conduct under Ohio law that is a legally required condition precedent to indemnification of Indemnitee hereunder against Indemnifiable


Losses relating to, arising out of or resulting from such Indemnifiable Claim (a “Standard of Conduct Determination”) shall be made as follows: (i) if a Change in Control shall not have occurred, or if a Change in Control shall have occurred but Indemnitee shall have requested that the Standard of Conduct Determination be made pursuant to this clause (i), (A) by a majority vote of a quorum consisting of the Disinterested Directors, (B) if such Disinterested Directors so direct, by a majority vote of a committee of Disinterested Directors designated by a majority vote of all Disinterested Directors, or (C) if such quorum of Disinterested Directors is not available or if a majority of such a quorum so direct, by Independent Counsel in a written opinion addressed to the Board, a copy of which shall be delivered to Indemnitee; and (ii) if a Change in Control shall have occurred and Indemnitee shall not have requested that the Standard of Conduct Determination be made pursuant to clause (i), by Independent Counsel in a written opinion addressed to the Board, a copy of which shall be delivered to Indemnitee. Indemnitee will cooperate with the person or persons making such Standard of Conduct Determination, including providing to such person or persons, upon reasonable advance request, any documentation or information which is not privileged or otherwise protected from disclosure and which is reasonably available to Indemnitee and reasonably necessary to such determination. The Company shall indemnify and hold harmless Indemnitee against and, if requested by Indemnitee, shall reimburse Indemnitee for, or advance to Indemnitee, within five business days of such request, any and all reasonable costs and expenses (including reasonable attorneys’ and experts’ fees and expenses) incurred by Indemnitee in so cooperating with the person or persons making such Standard of Conduct Determination.

(c) The Company shall use its reasonable best efforts to cause any Standard of Conduct Determination required under Section 7(b) to be made as promptly as practicable. If (i) the person or persons empowered or selected under Section 7 to make the Standard of Conduct Determination shall not have made a determination within 30 days after the later of (A) receipt by the Company of written notice from Indemnitee advising the Company of the final disposition of the applicable Indemnifiable Claim (the date of such receipt being the “Notification Date”) and (B) the selection of an Independent Counsel, if such determination is to be made by Independent Counsel, that is permitted under the provisions of Section 7(e) to make such determination and (ii) Indemnitee shall have fulfilled his/her obligations set forth in the second sentence of Section 7(b), then Indemnitee shall be deemed to have satisfied the applicable standard of conduct; provided that such 30-day period may be extended for a reasonable time, not to exceed an additional 30 days, if the person or persons making such determination in good faith requires such additional time for the obtaining or evaluation of documentation and/or information relating thereto.

(d) If (i) Indemnitee shall be entitled to indemnification hereunder against any Indemnifiable Losses pursuant to Section 7(a), (ii) no determination of whether Indemnitee has satisfied any applicable standard of conduct under Ohio law is a legally required condition precedent to indemnification of Indemnitee hereunder against any Indemnifiable Losses, or (iii) Indemnitee has been determined or deemed pursuant to Section 7(b) or (c) to have satisfied any applicable standard of conduct under Ohio law which is a legally required condition precedent to indemnification of Indemnitee hereunder against any Indemnifiable Losses, then the Company shall pay to Indemnitee, within five business days after the later of (x) the Notification Date in respect of the Indemnifiable Claim or portion thereof to which such Indemnifiable Losses are related, out of which such Indemnifiable Losses arose or from which such Indemnifiable Losses resulted and (y) the earliest date on which the applicable criterion specified in clause (i), (ii) or (iii) above shall have been satisfied, an amount equal to the amount of such Indemnifiable Losses.

 


(e) If a Standard of Conduct Determination is to be made by Independent Counsel pursuant to Section 7(b)(i), the Independent Counsel shall be selected by the Board of Directors, and the Company shall give written notice to Indemnitee advising him or her of the identity of the Independent Counsel so selected. If a Standard of Conduct Determination is to be made by Independent Counsel pursuant to Section 7(b)(ii), the Independent Counsel shall be selected by Indemnitee, and Indemnitee shall give written notice to the Company advising it of the identity of the Independent Counsel so selected. In either case, Indemnitee or the Company, as applicable, may, within five business days after receiving written notice of selection from the other, deliver to the other a written objection to such selection; provided , however , that such objection may be asserted only on the ground that the Independent Counsel so selected does not satisfy the criteria set forth in the definition of “Independent Counsel” in Section 1(k), and the objection shall set forth with particularity the factual basis of such assertion. Absent a proper and timely objection, the person or firm so selected shall act as Independent Counsel. If such written objection is properly and timely made and substantiated, (i) the Independent Counsel so selected may not serve as Independent Counsel unless and until such objection is withdrawn or a court has determined that such objection is without merit and (ii) the non-objecting party may, at its option, select an alternative Independent Counsel and give written notice to the other party advising such other party of the identity of the alternative Independent Counsel so selected, in which case the provisions of the two immediately preceding sentences and clause (i) of this sentence shall apply to such subsequent selection and notice. If applicable, the provisions of clause (ii) of the immediately preceding sentence shall apply to successive alternative selections. If no Independent Counsel that is permitted under the foregoing provisions of this Section 7(e) to make the Standard of Conduct Determination shall have been selected within 30 days after the Company gives its initial notice pursuant to the first sentence of this Section 7(e) or Indemnitee gives its initial notice pursuant to the second sentence of this Section 7(e), as the case may be, either the Company or Indemnitee may petition a court of competent jurisdiction for resolution of any objection which shall have been made by the Company or Indemnitee to the other’s selection of Independent Counsel and/or for the appointment as Independent Counsel of a person or firm selected by the court or by such other person as the court shall designate, and the person or firm with respect to whom all objections are so resolved or the person or firm so appointed will act as Independent Counsel. In all events, the Company shall pay all of the reasonable fees and expenses of the Independent Counsel incurred in connection with the Independent Counsel’s determination pursuant to Section 7(b).

8. Presumption of Entitlement . In making any Standard of Conduct Determination, the person or persons making such determination shall presume that Indemnitee has satisfied the applicable standard of conduct, and the Company may overcome such presumption only by its adducing clear and convincing evidence to the contrary. Any Standard of Conduct Determination that is adverse to Indemnitee may be challenged by the Indemnitee in the state or federal courts in Ohio. No determination by the Company (including by its directors or any Independent Counsel) that Indemnitee has not satisfied any applicable standard of conduct shall be a defense to any Claim by Indemnitee for indemnification or reimbursement or advance payment of Expenses by the Company hereunder or create a presumption that Indemnitee has not met any applicable standard of conduct.


9. No Other Presumption . For purposes of this Agreement, the termination of any Claim by judgment, order, settlement (whether with or without court approval) or conviction, or upon a plea of nolo contendere or its equivalent, will not create a presumption that Indemnitee did not meet any applicable standard of conduct or that indemnification hereunder is otherwise not permitted.

10. Non-Exclusivity . The rights of Indemnitee hereunder will be in addition to any other rights Indemnitee may have under the Constituent Documents, or the substantive laws of the Company’s jurisdiction of incorporation, any other contract or otherwise (collectively, “Other Indemnity Provisions”); provided , however , that (a) to the extent that Indemnitee otherwise would have any greater right to indemnification under any Other Indemnity Provision, Indemnitee will be deemed to have such greater right hereunder and (b) to the extent that any change is made to any Other Indemnity Provision which permits any greater right to indemnification than that provided under this Agreement as of the date hereof, Indemnitee will be deemed to have such greater right hereunder.

11. Liability Insurance and Funding . For the duration of Indemnitee’s service as a director and/or officer of the Company, and thereafter for so long as Indemnitee shall be subject to any pending or possible Indemnifiable Claim, the Company shall use commercially reasonable efforts (taking into account the scope and amount of coverage available relative to the cost thereof) to cause to be maintained in effect policies of directors’ and officers’ liability insurance providing coverage for directors and/or officers of the Company that is at least substantially comparable in scope and amount to that provided by the Company’s current policies of directors’ and officers’ liability insurance. The Company shall provide Indemnitee with a copy of all directors’ and officers’ liability insurance applications, binders, policies, declarations, endorsements and other related materials, and shall provide Indemnitee with a reasonable opportunity to review and comment on the same.

12. Subrogation . In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the related rights of recovery of Indemnitee against other persons or entities (other than Indemnitee’s successors), including any entity or enterprise referred to in clause (i) of the definition of “Indemnifiable Claim” in Section 1(i). Indemnitee shall execute all papers reasonably required to evidence such rights (all of Indemnitee’s reasonable Expenses, including attorneys’ fees and charges, related thereto to be reimbursed by or, at the option of Indemnitee, advanced by the Company).

13. No Duplication of Payments . The Company shall not be liable under this Agreement to make any payment to Indemnitee in respect of any Indemnifiable Losses to the extent Indemnitee has otherwise actually received payment (net of Expenses incurred in connection therewith) under any insurance policy, the Constituent Documents and Other Indemnity Provisions or otherwise (including from any entity or enterprise referred to in clause (i) of the definition of “Indemnifiable Claim” in Section 1(i)) in respect of such Indemnifiable Losses otherwise indemnifiable hereunder. Indemnitee shall be obligated to repay to the Company any such duplicate payment if actually made.


14. Defense of Claims . The Company shall be entitled to participate in the defense of any Indemnifiable Claim or to assume the defense thereof, with counsel reasonably satisfactory to the Indemnitee; provided that if Indemnitee believes, after consultation with counsel selected by Indemnitee, that (a) the use of counsel chosen by the Company to represent Indemnitee would present such counsel with an actual or potential conflict, (b) the named parties in any such Indemnifiable Claim (including any impleaded parties) include both the Company and Indemnitee and Indemnitee shall conclude that there may be one or more legal defenses available to Indemnitee that are different from or in addition to those available to the Company, or (c) any such representation by such counsel would be precluded under the applicable standards of professional conduct then prevailing, then Indemnitee shall be entitled to retain separate counsel (but not more than one law firm plus, if applicable, local counsel in respect of any particular Indemnifiable Claim) at the Company’s expense. The Company shall not be liable to Indemnitee under this Agreement for any amounts paid in settlement of any threatened or pending Indemnifiable Claim effected without the Company’s prior written consent. The Company shall not, without the prior written consent of the Indemnitee, effect any settlement of any threatened or pending Indemnifiable Claim to which the Indemnitee is, or could have been, a party unless such settlement solely involves the payment of money and includes a complete and unconditional release of the Indemnitee from all liability on any claims that are the subject matter of such Indemnifiable Claim. Neither the Company nor Indemnitee shall unreasonably withhold its consent to any proposed settlement; provided that Indemnitee may withhold consent to any settlement that does not provide a complete and unconditional release of Indemnitee.

 

15. Successors and Binding Agreement .

(a) The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation, reorganization or otherwise, and including any holding company as described in ORC 1701.802(A)) to all or substantially all of the business or assets of the Company, by agreement in customary form and substance, expressly to assume and agree to perform this Agreement in the same manner and to the same extent the Company would be required to perform if no such succession had taken place. This Agreement shall be binding upon and inure to the benefit of the Company and any successor to the Company, including any person acquiring directly or indirectly all or substantially all of the business or assets of the Company whether by purchase, merger, consolidation, reorganization or otherwise, and including any holding company as described in ORC 1701.802(A) (and such successor will thereafter be deemed the “Company” for purposes of this Agreement), but shall not otherwise be assignable or delegatable by the Company.

(b) This Agreement shall inure to the benefit of and be enforceable by the Indemnitee’s personal or legal representatives, executors, administrators, heirs, distributees, legatees and other successors.

(c) This Agreement is personal in nature and neither of the parties hereto shall, without the consent of the other, assign or delegate this Agreement or any rights or obligations hereunder except as expressly provided in Sections 15(a) and 15(b). Without limiting the generality or effect of the foregoing, Indemnitee’s right to receive payments hereunder shall not be assignable, whether by pledge, creation of a security interest or otherwise, other than by a transfer by the Indemnitee’s will or by the laws of descent and distribution, and, in the event of any attempted assignment or transfer contrary to this Section 15(c), the Company shall have no liability to pay any amount so attempted to be assigned or transferred.


(d) This Agreement supersedes in its entirety the Indemnification Agreement, dated as of «Last_Agree_Date», by and between the Company and Indemnitee.

16. Notices . For all purposes of this Agreement, all communications, including notices, consents, requests or approvals, required or permitted to be given hereunder shall be in writing and shall be deemed to have been duly given when hand delivered or dispatched by electronic facsimile transmission or electronic mail (with receipt thereof orally confirmed), or five business days after having been mailed by United States registered or certified mail, return receipt requested, postage prepaid or one business day after having been sent for next day delivery by a nationally recognized overnight courier service, addressed to the Company (to the attention of the Secretary of the Company) and to Indemnitee at the applicable address shown on the signature page hereto, or to such other address as any party may have furnished to the other in writing and in accordance herewith, except that notices of changes of address will be effective only upon receipt.

17. Governing Law . The validity, interpretation, construction and performance of this Agreement shall be governed by and construed in accordance with the substantive laws of the State of Ohio, without giving effect to the principles of conflict of laws of such State. The Company and Indemnitee each hereby irrevocably consent to the jurisdiction of the state and Federal courts in Ohio for all purposes in connection with any action or proceeding which arises out of or relates to this Agreement and agree that any action instituted under this Agreement shall be brought only in the state or Federal courts in Ohio.

18. Validity . If any provision of this Agreement or the application of any provision hereof to any person or circumstance is held invalid, unenforceable or otherwise illegal, the remainder of this Agreement and the application of such provision to any other person or circumstance shall not be affected, and the provision so held to be invalid, unenforceable or otherwise illegal shall be reformed to the extent, and only to the extent, necessary to make it enforceable, valid or legal. In the event that any court or other adjudicative body shall decline to reform any provision of this Agreement held to be invalid, unenforceable or otherwise illegal as contemplated by the immediately preceding sentence, the parties thereto shall take all such action as may be necessary or appropriate to replace the provision so held to be invalid, unenforceable or otherwise illegal with one or more alternative provisions that effectuate the purpose and intent of the original provisions of this Agreement as fully as possible without being invalid, unenforceable or otherwise illegal.

19. Miscellaneous . No provision of this Agreement may be waived, modified or discharged unless such waiver, modification or discharge is agreed to in writing signed by Indemnitee and the Company. No waiver by either party hereto at any time of any breach by the other party hereto or compliance with any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, expressed or implied with respect to the subject matter hereof have been made by either party that are not set forth expressly in this Agreement.


20. Legal Fees and Expenses . It is the intent of the Company that Indemnitee not be required to incur legal fees and or other Expenses associated with the interpretation, enforcement or defense of Indemnitee’s rights under this Agreement by litigation or otherwise because the cost and expense thereof would substantially detract from the benefits intended to be extended to Indemnitee hereunder. Accordingly, without limiting the generality or effect of any other provision hereof, if it should appear to Indemnitee that the Company has failed to comply with any of its obligations under this Agreement (including its obligations under Section 3) or in the event that the Company or any other person takes or threatens to take any action to declare this Agreement void or unenforceable, or institutes any litigation or other action or proceeding designed to deny, or to recover from, Indemnitee the benefits provided or intended to be provided to Indemnitee hereunder, the Company irrevocably authorizes the Indemnitee from time to time to retain counsel of Indemnitee’s choice, and the reasonable costs and expenses of such counsel shall be the obligation of the Company as hereafter provided, to advise and represent Indemnitee in connection with any such interpretation, enforcement or defense, including the initiation or defense of any litigation or other legal action, whether by or against the Company or any director, officer, shareholder or other person affiliated with the Company, in any jurisdiction.

21. Certain Interpretive Matters . Unless the context of this Agreement otherwise requires, (a) “it” or “its” or words of any gender include each other gender, (b) words using the singular or plural number also include the plural or singular number, respectively, (c) the terms “hereof,” “herein,” “hereby” and derivative or similar words refer to this entire Agreement, (d) the terms “Article,” “Section,” “Annex” or “Exhibit” refer to the specified Article, Section, Annex or Exhibit of or to this Agreement, (e) the terms “include,” “includes” and “including” will be deemed to be followed by the words “without limitation” (whether or not so expressed), and (f) the word “or” is disjunctive but not exclusive. Whenever this Agreement refers to a number of days, such number will refer to calendar days unless business days are specified and whenever action must be taken (including the giving of notice or the delivery of documents) under this Agreement during a certain period of time or by a particular date that ends or occurs on a non-business day, then such period or date will be extended until the immediately following business day. As used herein, “business day” means any day other than Saturday, Sunday or a United States federal holiday.

22. Counterparts . This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original but all of which together shall constitute one and the same agreement.

[Signature page follows.]


IN WITNESS WHEREOF, Indemnitee has executed and the Company has caused its duly authorized representative to execute this Agreement as of the date first above written.

 

THE GORMAN-RUPP COMPANY
By:    
Name:  
Title:  

 

INDEMNITEE

 

Name:   First Name    Last Name
Address:   HM Mailing Address
  BD Mailing City,
  BD Mailing ST    BD Mailing ZIP


[FORM OF UNDERTAKING]

UNDERTAKING

 

STATE OF )
) SS:

COUNTY OF

)

I, ______________, being first duly sworn, do depose and say as follows:

1. This Undertaking is submitted pursuant to the Director Indemnification Agreement, dated ___________, 2014, between The Gorman-Rupp Company, an Ohio corporation (the “Company”) and the undersigned.

2. I am requesting payment of Expenses that I have reasonably incurred or will reasonably incur in defending an Indemnifiable Claim referred to in the aforesaid Director Indemnification Agreement.

3. The Expenses for which payment is requested are, in general, all expenses related to __________________.

4. Part A

I hereby undertake to (a) repay all amounts paid pursuant hereto if it is proved by clear and convincing evidence in a court of competent jurisdiction that my action or failure to act which is the subject of the matter described herein involved an act or omission undertaken with deliberate intent to cause injury to the Company or undertaken with reckless disregard for the best interests of the Company and (b) reasonably cooperate with the Company concerning the action, suit, proceeding or claim.

 

 

 

(Signature of Indemnitee)
[Indemnitee Name]

 

5. Part B

I hereby undertake to repay all amounts paid pursuant hereto if it ultimately is determined that I am not entitled to be indemnified by the Company under the aforesaid Director Indemnification Agreement or otherwise.

 

 

 

(Signature of Indemnitee)
[Indemnitee Name]

Subscribed and sworn to before me, a Notary Public in and for said County and State, this day of ______________, 20__.

 

 

 

[Seal]

My commission expires the ___________ day of ____________, 20__.

 

Exhibit 10(b)

OFFICER INDEMNIFICATION AGREEMENT

This Officer Indemnification Agreement, dated as of July 25, 2014 (this “Agreement”), is made by and between The Gorman-Rupp Company, an Ohio corporation (the “Company”), and «First_Name»«Last_Name» (“Indemnitee”).

RECITALS:

A. Both the Company and the Indemnitee recognize that recent federal legislation and rules adopted by the Securities and Exchange Commission and the national securities exchanges have imposed additional disclosure and corporate governance obligations on directors and officers of public companies and have exposed such directors and officers to the increased risk of litigation and other claims being asserted against them.

B. The Company’s Board of Directors (the “Board”) has determined that enhancing the ability of the Company to retain and attract as directors and officers the most capable persons is in the best interests of the Company and that the Company therefore should seek to assure such persons that indemnification and insurance coverage is available.

C. Indemnitee is an officer of the Company and Indemnitee’s willingness to serve in such capacity is predicated, in substantial part, upon the Company’s willingness to indemnify Indemnitee in accordance with the principles reflected above, to the fullest extent permitted by the laws of the state of Ohio, and upon the other undertakings set forth in this Agreement.

D. Therefore, in recognition of the need to provide Indemnitee with substantial protection against personal liability, in order to procure Indemnitee’s continued service as an officer of the Company and to enhance Indemnitee’s ability to serve the Company in an effective manner, and in order to provide such protection pursuant to express contract rights (intended to be enforceable irrespective of, among other things, any amendment to the Company’s Articles of Incorporation or Code of Regulations (collectively, the “Constituent Documents”), any change in the composition of the Board or any change-in-control or business combination transaction relating to the Company), the Company wishes to provide in this Agreement for the indemnification of, and the advancement of Expenses (as defined in Section 1(g)), to Indemnitee as set forth in this Agreement and for the continued coverage of Indemnitee under the Company’s directors’ and officers’ liability insurance policies.

AGREEMENT:

NOW, THEREFORE, the parties hereby agree as follows:

1. Certain Definitions . In addition to terms defined elsewhere herein, the following terms have the following meanings when used in this Agreement with initial capital letters:

(a) “Change in Control” means the occurrence after the date of this Agreement of any of the following events:


(i) the acquisition by any individual, entity or group (within the meaning of Sections 13(d)(3) or 14(d)(2) of the Exchange Act) (a “Person”) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of [30]% or more of the combined voting power of the then-outstanding Voting Stock of the Company unless the change in relative beneficial ownership of such Person results solely from a reduction in the aggregate number of outstanding shares of Voting Stock of the Company; provided , however , that, for purposes of this Section 1(a)(i), the following acquisitions shall not constitute a Change in Control: (1) any acquisition of Voting Stock of the Company directly from the Company that is approved by a majority of the Incumbent Directors, (2) any acquisition of Voting Stock of the Company by the Company or any Subsidiary, (3) any acquisition of Voting Stock of the Company by any employee benefit plan (or related trust) sponsored or maintained by the Company or any Subsidiary, and (4) any acquisition of Voting Stock of the Company by any Excepted Person; or

(ii) a majority of the Directors are not Incumbent Directors; or

(iii) the consummation of a reorganization, merger or consolidation, unless immediately following such reorganization, merger or consolidation, all of the individuals and entities who were the beneficial owners of Voting Stock of the Company immediately prior to such transaction beneficially own, directly or indirectly, more than [51]% of the combined voting power of the then outstanding shares of Voting Stock of the entity resulting from such transaction; or

(iv) approval by the shareholders of the Company of a complete liquidation or dissolution of the Company, or sale or other disposition of all or substantially all of the assets of the Company.

(b) “Claim” means (i) any threatened, asserted, pending or completed claim, demand, action, suit or proceeding, whether civil, criminal, administrative, arbitrative, investigative or other, and whether made pursuant to federal, state or other law; and (ii) any threatened, pending or completed inquiry or investigation, whether made, instituted or conducted by the Company or any other person, including any federal, state or other governmental entity, that Indemnitee determines might lead to the institution of any such claim, demand, action, suit or proceeding.

(c) “Controlled Affiliate” means any corporation, limited liability company, partnership, joint venture, trust or other entity or enterprise, whether or not for profit, that is directly or indirectly controlled by the Company. For purposes of this definition, “control” means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of an entity or enterprise, whether through the ownership of voting securities, through other voting rights, by contract or otherwise; provided that direct or indirect beneficial ownership of capital stock or other interests in an entity or enterprise entitling the holder to cast 20% or more of the total number of votes generally entitled to be cast in the election of directors (or persons performing comparable functions) of such entity or enterprise shall be deemed to constitute control for purposes of this definition.

(d) “Disinterested Director” means a director of the Company who is not and was not a party to the Claim in respect of which indemnification is sought by Indemnitee.


(e) “Excepted Persons” means any one or more of the following: (i) James C. Gorman or any affiliate of James C. Gorman, (ii) any spouse, sibling or lineal descendant of James C. Gorman, or any of their spouses, siblings or lineal descendants, or (iii) any trust, corporation or other entity set up for the primary benefit of, or majority owned or otherwise controlled by, any of the persons or entities described in the foregoing clauses (i) or (ii).

(f) “Exchange Act” shall mean the Securities Exchange Act of 1934, as amended.

(g) “Expenses” means reasonable attorneys’ and experts’ fees and expenses and all other reasonable costs and expenses paid or payable in connection with investigating, defending, being a witness in or participating in (including on appeal), or preparing to investigate, defend, be a witness in or participate in (including on appeal), any Claim.

(h) “Incumbent Directors” means the individuals who, as of the date hereof, are Directors of the Company and any individual becoming a Director subsequent to the date hereof whose election, nomination for election by the Company’s shareholders, or appointment, was approved by a vote of at least two-thirds of the then Incumbent Directors.

(i) “Indemnifiable Claim” means any Claim based upon, arising out of or resulting from (i) any actual, alleged or suspected act or failure to act, whether before, on or after the date of this Agreement, by Indemnitee in his or her capacity as a director, officer, employee or agent of the Company or as a director, officer, employee, member, manager, trustee or agent of any other corporation, limited liability company, partnership, joint venture, trust or other entity or enterprise, whether or not for profit, as to which Indemnitee is or was serving at the request of the Company as a director, officer, employee, member, manager, trustee or agent, (ii) any actual, alleged or suspected act or failure to act, whether before, on or after the date of this Agreement, by Indemnitee in respect of any business, transaction, communication, filing, disclosure or other activity of the Company or any other entity or enterprise referred to in clause (i) of this sentence, or (iii) Indemnitee’s status as a current or former director, officer, employee or agent of the Company or as a current or former director, officer, employee, member, manager, trustee or agent of the Company or any other entity or enterprise referred to in clause (i) of this sentence or any actual, alleged or suspected act or failure to act by Indemnitee in connection with any obligation or restriction imposed upon Indemnitee by reason of such status. In addition to any service at the actual request of the Company, for purposes of this Agreement, Indemnitee shall be deemed to be serving or to have served at the request of the Company as a director, officer, employee, member, manager, trustee or agent of another entity or enterprise if Indemnitee is or was serving as a director, officer, employee, member, manager, trustee or agent of such entity or enterprise and (i) such entity or enterprise is or at the time of such service was a Controlled Affiliate, (ii) such entity or enterprise is or at the time of such service was an employee benefit plan (or related trust) sponsored or maintained by the Company or a Controlled Affiliate, or (iii) the Company or a Controlled Affiliate directly or indirectly caused or authorized Indemnitee to be nominated, elected, appointed, designated, employed, engaged or selected to serve in such capacity.

(j) “Indemnifiable Losses” means any and all Losses relating to, arising out of or resulting from any Indemnifiable Claim.


(k) “Independent Counsel” means a law firm, or a member of a law firm, that is experienced in matters of corporation law and neither presently is, nor in the past five years has been, retained to represent: (i) the Company (or any Subsidiary) or Indemnitee (or any immediate family member of Indemnitee) in any matter material to either such party (other than with respect to matters concerning the Indemnitee under this Agreement, or of other indemnitees under similar indemnification agreements), or (ii) any other named (or, as to a threatened matter, reasonably likely to be named) party to the Indemnifiable Claim giving rise to a claim for indemnification hereunder. Notwithstanding the foregoing, the term “Independent Counsel” shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or Indemnitee in an action to determine Indemnitee’s rights under this Agreement.

(l) “Losses” means any and all Expenses, damages, losses, liabilities, judgments, fines, penalties (whether civil, criminal or other) and amounts paid in settlement, including all interest, assessments and other charges paid or payable in connection with or in respect of any of the foregoing.

(m) “ORC” means the Ohio Revised Code.

(n) “Subsidiary” means an entity in which the Company directly or indirectly beneficially owns 50% or more of the outstanding Voting Stock.

(o) “Voting Stock” means securities entitled to vote generally in the election of directors (or similar governing bodies).

2. Indemnification Obligation . Subject to Section 7, the Company shall indemnify, defend and hold harmless Indemnitee, to the fullest extent permitted or required by the laws of the State of Ohio in effect on the date hereof or as such laws may from time to time hereafter be amended to increase the scope of such permitted indemnification, against any and all Indemnifiable Claims and Indemnifiable Losses. Notwithstanding the foregoing, Indemnitee shall not be entitled to indemnification pursuant to this Agreement:

(a) in connection with any Claim initiated by Indemnitee against the Company or any director or officer of the Company (i) unless the Company has joined in or consented to the initiation of such Claim or (ii) except for a Claim initiated by Indemnitee pursuant to Section 4 or Section 20, in which case Indemnitee shall be entitled to indemnification to the extent set forth in Section 4 or Section 20, as the case may be;

(b) if a final decision by a court of competent jurisdiction determines that such indemnification is prohibited by applicable law;

(c) for the disgorgement of profits arising from the purchase or sale by Indemnitee of securities of the Company in violation of Section 16(b) of the Exchange Act; or

(d) for Indemnitee’s reimbursement to the Company of any bonus or other incentive-based or equity-based compensation previously received by Indemnitee or payment of any profits realized by Indemnitee from the sale of securities of the Company, as required in each case under the Exchange Act, any applicable rules or regulations promulgated by the Securities and Exchange Commission or any national securities exchange or national securities association on which the Company’s securities may be traded, and any Company policy adopted pursuant to such law, rules or regulations.


3. Advancement of Expenses . Indemnitee shall have the right to advancement by the Company, prior to the final disposition of any Indemnifiable Claim, of any and all Expenses relating to, arising out of or resulting from any Indemnifiable Claim actually and reasonably paid or incurred by Indemnitee. Indemnitee’s right to such advancement is not subject to the satisfaction of any standard of conduct. Without limiting the generality or effect of the foregoing, within five business days after any request by Indemnitee, the Company shall, in accordance with such request (but without duplication), (a) pay such Expenses on behalf of Indemnitee, (b) advance to Indemnitee funds in an amount sufficient to pay such Expenses, or (c) reimburse Indemnitee for such Expenses; provided that Indemnitee shall repay, without interest any amounts actually advanced to Indemnitee that, at the final disposition of the Indemnifiable Claim to which the advance related, were in excess of amounts paid or payable by Indemnitee in respect of Expenses relating to, arising out of or resulting from such Indemnifiable Claim. For purposes of obtaining payments of Expenses in advance of final disposition, the Indemnitee shall submit to the Company a sworn request for advancement of Expenses substantially in the form of Exhibit A attached hereto and made a part hereof (subject to Indemnitee filling in the blanks therein and selecting from among the bracketed alternatives therein, the “Undertaking”), averring that Indemnitee has reasonably incurred or will reasonably incur actual Expenses in defending an Indemnifiable Claim. The Undertaking need not be secured and the Company must accept the Undertaking without reference to Indemnitee’s ability to repay the Expenses. In no event shall Indemnitee’s right to the payment, advancement or reimbursement of Expenses pursuant to this Section 3 be conditioned upon any undertaking that is less favorable to Indemnitee than, or that is in addition to, the undertakings set forth in Exhibit A .

4. Indemnification for Additional Expenses . Without limiting the generality or effect of the foregoing, the Company shall indemnify and hold harmless Indemnitee against and, if requested by Indemnitee, shall reimburse Indemnitee for, or advance to Indemnitee, within five business days of such request, any and all Expenses actually and reasonably paid or incurred by Indemnitee in connection with any Claim made, instituted or conducted by Indemnitee for (a) indemnification or payment, advancement or reimbursement of Expenses by the Company under any provision of this Agreement, or under any other agreement or provision of the Constituent Documents now or hereafter in effect relating to Indemnifiable Claims, and/or (b) recovery under any directors’ and officers’ liability insurance policies maintained by the Company, regardless in each case of whether Indemnitee ultimately is determined to be entitled to such indemnification, reimbursement, advance or insurance recovery, as the case may be; provided , however , that Indemnitee shall return, without interest, any such advance of Expenses (or portion thereof) which remains unspent at the final disposition of the Claim to which the advance related.

5. Partial Indemnity . If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of any Indemnifiable Loss, but not for all of the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion thereof to which Indemnitee is entitled.


6. Procedure for Notification . To obtain indemnification under this Agreement in respect of an Indemnifiable Claim or Indemnifiable Loss, Indemnitee shall submit to the Company a written request, including a brief description (based upon information then available to Indemnitee) of such Indemnifiable Claim or Indemnifiable Loss. If, at the time of the receipt of such request, the Company has directors’ and officers’ liability insurance in effect under which coverage for such Indemnifiable Claim or Indemnifiable Loss is reasonably likely to be available, the Company shall give prompt written notice of such Indemnifiable Claim or Indemnifiable Loss to the applicable insurers in accordance with the procedures set forth in the applicable policies. The Company shall provide to Indemnitee a copy of such notice delivered to the applicable insurers, and copies of all subsequent correspondence between the Company and such insurers regarding the Indemnifiable Claim or Indemnifiable Loss, in each case substantially concurrently with the delivery or receipt thereof by the Company. The failure by Indemnitee to timely notify the Company of any Indemnifiable Claim or Indemnifiable Loss shall not relieve the Company from any liability hereunder unless, and only to the extent that, the Company did not otherwise learn of such Indemnifiable Claim or Indemnifiable Loss and such failure results in forfeiture by the Company of substantial defenses, rights or insurance coverage.

7. Determination of Right to Indemnification .

(a) To the extent that Indemnitee shall have been successful on the merits or otherwise in defense of any Indemnifiable Claim or any portion thereof or in defense of any issue or matter therein, including dismissal without prejudice, Indemnitee shall be indemnified against all Indemnifiable Losses relating to, arising out of or resulting from such Indemnifiable Claim in accordance with Section 2 and no Standard of Conduct Determination (as defined in Section 7(b)) shall be required. In the event that a matter as to which there has been a dismissal without prejudice is later revived in the same or similar form, that matter will be treated as a new Claim for all purposes of this Agreement.

(b) To the extent that the provisions of Section 7(a) are inapplicable to an Indemnifiable Claim that shall have been finally disposed of, any determination of whether Indemnitee has satisfied any applicable standard of conduct under Ohio law that is a legally required condition precedent to indemnification of Indemnitee hereunder against Indemnifiable Losses relating to, arising out of or resulting from such Indemnifiable Claim (a “Standard of Conduct Determination”) shall be made as follows: (i) if a Change in Control shall not have occurred, or if a Change in Control shall have occurred but Indemnitee shall have requested that the Standard of Conduct Determination be made pursuant to this clause (i), (A) by a majority vote of a quorum consisting of the Disinterested Directors, (B) if such Disinterested Directors so direct, by a majority vote of a committee of Disinterested Directors designated by a majority vote of all Disinterested Directors, or (C) if such quorum of Disinterested Directors is not available or if a majority of such a quorum so direct, by Independent Counsel in a written opinion addressed to the Board, a copy of which shall be delivered to Indemnitee; and (ii) if a Change in Control shall have occurred and Indemnitee shall not have requested that the Standard of Conduct Determination be made pursuant to clause (i), by Independent Counsel in a written opinion addressed to the Board, a copy of which shall be delivered to Indemnitee. Indemnitee will cooperate with the person or persons making such Standard of Conduct Determination, including providing to such person or persons, upon reasonable advance request, any documentation or information which is not privileged or otherwise protected from disclosure and which is


reasonably available to Indemnitee and reasonably necessary to such determination. The Company shall indemnify and hold harmless Indemnitee against and, if requested by Indemnitee, shall reimburse Indemnitee for, or advance to Indemnitee, within five business days of such request, any and all reasonable costs and expenses (including reasonable attorneys’ and experts’ fees and expenses) incurred by Indemnitee in so cooperating with the person or persons making such Standard of Conduct Determination.

(c) The Company shall use its reasonable best efforts to cause any Standard of Conduct Determination required under Section 7(b) to be made as promptly as practicable. If (i) the person or persons empowered or selected under Section 7 to make the Standard of Conduct Determination shall not have made a determination within 30 days after the later of (A) receipt by the Company of written notice from Indemnitee advising the Company of the final disposition of the applicable Indemnifiable Claim (the date of such receipt being the “Notification Date”) and (B) the selection of an Independent Counsel, if such determination is to be made by Independent Counsel, that is permitted under the provisions of Section 7(e) to make such determination and (ii) Indemnitee shall have fulfilled his/her obligations set forth in the second sentence of Section 7(b), then Indemnitee shall be deemed to have satisfied the applicable standard of conduct; provided that such 30-day period may be extended for a reasonable time, not to exceed an additional 30 days, if the person or persons making such determination in good faith requires such additional time for the obtaining or evaluation of documentation and/or information relating thereto.

(d) If (i) Indemnitee shall be entitled to indemnification hereunder against any Indemnifiable Losses pursuant to Section 7(a), (ii) no determination of whether Indemnitee has satisfied any applicable standard of conduct under Ohio law is a legally required condition precedent to indemnification of Indemnitee hereunder against any Indemnifiable Losses, or (iii) Indemnitee has been determined or deemed pursuant to Section 7(b) or (c) to have satisfied any applicable standard of conduct under Ohio law which is a legally required condition precedent to indemnification of Indemnitee hereunder against any Indemnifiable Losses, then the Company shall pay to Indemnitee, within five business days after the later of (x) the Notification Date in respect of the Indemnifiable Claim or portion thereof to which such Indemnifiable Losses are related, out of which such Indemnifiable Losses arose or from which such Indemnifiable Losses resulted and (y) the earliest date on which the applicable criterion specified in clause (i), (ii) or (iii) above shall have been satisfied, an amount equal to the amount of such Indemnifiable Losses.

(e) If a Standard of Conduct Determination is to be made by Independent Counsel pursuant to Section 7(b)(i), the Independent Counsel shall be selected by the Board of Directors, and the Company shall give written notice to Indemnitee advising him or her of the identity of the Independent Counsel so selected. If a Standard of Conduct Determination is to be made by Independent Counsel pursuant to Section 7(b)(ii), the Independent Counsel shall be selected by Indemnitee, and Indemnitee shall give written notice to the Company advising it of the identity of the Independent Counsel so selected. In either case, Indemnitee or the Company, as applicable, may, within five business days after receiving written notice of selection from the other, deliver to the other a written objection to such selection; provided , however , that such objection may be asserted only on the ground that the Independent Counsel so selected does not satisfy the criteria set forth in the definition of “Independent Counsel” in Section 1(k), and the


objection shall set forth with particularity the factual basis of such assertion. Absent a proper and timely objection, the person or firm so selected shall act as Independent Counsel. If such written objection is properly and timely made and substantiated, (i) the Independent Counsel so selected may not serve as Independent Counsel unless and until such objection is withdrawn or a court has determined that such objection is without merit and (ii) the non-objecting party may, at its option, select an alternative Independent Counsel and give written notice to the other party advising such other party of the identity of the alternative Independent Counsel so selected, in which case the provisions of the two immediately preceding sentences and clause (i) of this sentence shall apply to such subsequent selection and notice. If applicable, the provisions of clause (ii) of the immediately preceding sentence shall apply to successive alternative selections. If no Independent Counsel that is permitted under the foregoing provisions of this Section 7(e) to make the Standard of Conduct Determination shall have been selected within 30 days after the Company gives its initial notice pursuant to the first sentence of this Section 7(e) or Indemnitee gives its initial notice pursuant to the second sentence of this Section 7(e), as the case may be, either the Company or Indemnitee may petition a court of competent jurisdiction for resolution of any objection which shall have been made by the Company or Indemnitee to the other’s selection of Independent Counsel and/or for the appointment as Independent Counsel of a person or firm selected by the court or by such other person as the court shall designate, and the person or firm with respect to whom all objections are so resolved or the person or firm so appointed will act as Independent Counsel. In all events, the Company shall pay all of the reasonable fees and expenses of the Independent Counsel incurred in connection with the Independent Counsel’s determination pursuant to Section 7(b).

8. Presumption of Entitlement . In making any Standard of Conduct Determination, the person or persons making such determination shall presume that Indemnitee has satisfied the applicable standard of conduct, and the Company may overcome such presumption only by its adducing clear and convincing evidence to the contrary. Any Standard of Conduct Determination that is adverse to Indemnitee may be challenged by the Indemnitee in the state or federal courts in Ohio. No determination by the Company (including by its directors or any Independent Counsel) that Indemnitee has not satisfied any applicable standard of conduct shall be a defense to any Claim by Indemnitee for indemnification or reimbursement or advance payment of Expenses by the Company hereunder or create a presumption that Indemnitee has not met any applicable standard of conduct.

9. No Other Presumption . For purposes of this Agreement, the termination of any Claim by judgment, order, settlement (whether with or without court approval) or conviction, or upon a plea of nolo contendere or its equivalent, will not create a presumption that Indemnitee did not meet any applicable standard of conduct or that indemnification hereunder is otherwise not permitted.

10. Non-Exclusivity . The rights of Indemnitee hereunder will be in addition to any other rights Indemnitee may have under the Constituent Documents, or the substantive laws of the Company’s jurisdiction of incorporation, any other contract or otherwise (collectively, “Other Indemnity Provisions”); provided , however , that (a) to the extent that Indemnitee otherwise would have any greater right to indemnification under any Other Indemnity Provision, Indemnitee will be deemed to have such greater right hereunder and (b) to the extent that any change is made to any Other Indemnity Provision which permits any greater right to indemnification than that provided under this Agreement as of the date hereof, Indemnitee will be deemed to have such greater right hereunder.


11. Liability Insurance and Funding . For the duration of Indemnitee’s service as an officer of the Company, and thereafter for so long as Indemnitee shall be subject to any pending or possible Indemnifiable Claim, the Company shall use commercially reasonable efforts (taking into account the scope and amount of coverage available relative to the cost thereof) to cause to be maintained in effect policies of directors’ and officers’ liability insurance providing coverage for directors and/or officers of the Company that is at least substantially comparable in scope and amount to that provided by the Company’s current policies of directors’ and officers’ liability insurance. The Company shall provide Indemnitee with a copy of all directors’ and officers’ liability insurance policies in effect from time to time.

12. Subrogation . In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the related rights of recovery of Indemnitee against other persons or entities (other than Indemnitee’s successors), including any entity or enterprise referred to in clause (i) of the definition of “Indemnifiable Claim” in Section 1(i). Indemnitee shall execute all papers reasonably required to evidence such rights (all of Indemnitee’s reasonable Expenses, including attorneys’ fees and charges, related thereto to be reimbursed by or, at the option of Indemnitee, advanced by the Company).

13. No Duplication of Payments . The Company shall not be liable under this Agreement to make any payment to Indemnitee in respect of any Indemnifiable Losses to the extent Indemnitee has otherwise actually received payment (net of Expenses incurred in connection therewith) under any insurance policy, the Constituent Documents and Other Indemnity Provisions or otherwise (including from any entity or enterprise referred to in clause (i) of the definition of “Indemnifiable Claim” in Section 1(i)) in respect of such Indemnifiable Losses otherwise indemnifiable hereunder. Indemnitee shall be obligated to repay to the Company any such duplicate payment if actually made.

14. Defense of Claims . The Company shall be entitled to participate in the defense of any Indemnifiable Claim or to assume the defense thereof, with counsel reasonably satisfactory to the Indemnitee; provided that if Indemnitee believes, after consultation with counsel selected by Indemnitee, that (a) the use of counsel chosen by the Company to represent Indemnitee would present such counsel with an actual or potential conflict, (b) the named parties in any such Indemnifiable Claim (including any impleaded parties) include both the Company and Indemnitee and Indemnitee shall conclude that there may be one or more legal defenses available to Indemnitee that are different from or in addition to those available to the Company, or (c) any such representation by such counsel would be precluded under the applicable standards of professional conduct then prevailing, then Indemnitee shall be entitled to retain separate counsel (but not more than one law firm plus, if applicable, local counsel in respect of any particular Indemnifiable Claim) at the Company’s expense. The Company shall not be liable to Indemnitee under this Agreement for any amounts paid in settlement of any threatened or pending Indemnifiable Claim effected without the Company’s prior written consent. The Company shall not, without the prior written consent of the Indemnitee, effect any settlement of any threatened or pending Indemnifiable Claim to which the Indemnitee is, or could have been, a party unless such settlement solely involves the payment of money and includes a complete and


unconditional release of the Indemnitee from all liability on any claims that are the subject matter of such Indemnifiable Claim. Neither the Company nor Indemnitee shall unreasonably withhold its consent to any proposed settlement; provided that Indemnitee may withhold consent to any settlement that does not provide a complete and unconditional release of Indemnitee.

 

15. Successors and Binding Agreement .

(a) The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation, reorganization or otherwise, and including any holding company as described in ORC 1701.802(A)) to all or substantially all of the business or assets of the Company, by agreement in customary form and substance, expressly to assume and agree to perform this Agreement in the same manner and to the same extent the Company would be required to perform if no such succession had taken place. This Agreement shall be binding upon and inure to the benefit of the Company and any successor to the Company, including any person acquiring directly or indirectly all or substantially all of the business or assets of the Company whether by purchase, merger, consolidation, reorganization or otherwise, and including any holding company as described in ORC 1701.802(A) (and such successor will thereafter be deemed the “Company” for purposes of this Agreement), but shall not otherwise be assignable or delegatable by the Company.

(b) This Agreement shall inure to the benefit of and be enforceable by the Indemnitee’s personal or legal representatives, executors, administrators, heirs, distributees, legatees and other successors.

(c) This Agreement is personal in nature and neither of the parties hereto shall, without the consent of the other, assign or delegate this Agreement or any rights or obligations hereunder except as expressly provided in Sections 15(a) and 15(b). Without limiting the generality or effect of the foregoing, Indemnitee’s right to receive payments hereunder shall not be assignable, whether by pledge, creation of a security interest or otherwise, other than by a transfer by the Indemnitee’s will or by the laws of descent and distribution, and, in the event of any attempted assignment or transfer contrary to this Section 15(c), the Company shall have no liability to pay any amount so attempted to be assigned or transferred.

(d) This Agreement supersedes in its entirety the Indemnification Agreement, dated as of «Last_Agree_Date», by and between the Company and Indemnitee.

16. Notices . For all purposes of this Agreement, all communications, including notices, consents, requests or approvals, required or permitted to be given hereunder shall be in writing and shall be deemed to have been duly given when hand delivered or dispatched by electronic facsimile transmission or electronic mail (with receipt thereof orally confirmed), or five business days after having been mailed by United States registered or certified mail, return receipt requested, postage prepaid or one business day after having been sent for next day delivery by a nationally recognized overnight courier service, addressed to the Company (to the attention of the Secretary of the Company) and to Indemnitee at the applicable address shown on the signature page hereto, or to such other address as any party may have furnished to the other in writing and in accordance herewith, except that notices of changes of address will be effective only upon receipt.


17. Governing Law . The validity, interpretation, construction and performance of this Agreement shall be governed by and construed in accordance with the substantive laws of the State of Ohio, without giving effect to the principles of conflict of laws of such State. The Company and Indemnitee each hereby irrevocably consent to the jurisdiction of the state and Federal courts in Ohio for all purposes in connection with any action or proceeding which arises out of or relates to this Agreement and agree that any action instituted under this Agreement shall be brought only in the state or Federal courts in Ohio.

18. Validity . If any provision of this Agreement or the application of any provision hereof to any person or circumstance is held invalid, unenforceable or otherwise illegal, the remainder of this Agreement and the application of such provision to any other person or circumstance shall not be affected, and the provision so held to be invalid, unenforceable or otherwise illegal shall be reformed to the extent, and only to the extent, necessary to make it enforceable, valid or legal. In the event that any court or other adjudicative body shall decline to reform any provision of this Agreement held to be invalid, unenforceable or otherwise illegal as contemplated by the immediately preceding sentence, the parties thereto shall take all such action as may be necessary or appropriate to replace the provision so held to be invalid, unenforceable or otherwise illegal with one or more alternative provisions that effectuate the purpose and intent of the original provisions of this Agreement as fully as possible without being invalid, unenforceable or otherwise illegal.

19. Miscellaneous . No provision of this Agreement may be waived, modified or discharged unless such waiver, modification or discharge is agreed to in writing signed by Indemnitee and the Company. No waiver by either party hereto at any time of any breach by the other party hereto or compliance with any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, expressed or implied with respect to the subject matter hereof have been made by either party that are not set forth expressly in this Agreement.

20. Legal Fees and Expenses . It is the intent of the Company that Indemnitee not be required to incur legal fees and or other Expenses associated with the interpretation, enforcement or defense of Indemnitee’s rights under this Agreement by litigation or otherwise because the cost and expense thereof would substantially detract from the benefits intended to be extended to Indemnitee hereunder. Accordingly, without limiting the generality or effect of any other provision hereof, if it should appear to Indemnitee that the Company has failed to comply with any of its obligations under this Agreement (including its obligations under Section 3) or in the event that the Company or any other person takes or threatens to take any action to declare this Agreement void or unenforceable, or institutes any litigation or other action or proceeding designed to deny, or to recover from, Indemnitee the benefits provided or intended to be provided to Indemnitee hereunder, the Company irrevocably authorizes the Indemnitee from time to time to retain counsel of Indemnitee’s choice, and the reasonable costs and expenses of such counsel shall be the obligation of the Company as hereafter provided, to advise and represent Indemnitee in connection with any such interpretation, enforcement or defense, including the initiation or defense of any litigation or other legal action, whether by or against the Company or any director, officer, shareholder or other person affiliated with the Company, in any jurisdiction.


21. Certain Interpretive Matters . Unless the context of this Agreement otherwise requires, (a) “it” or “its” or words of any gender include each other gender, (b) words using the singular or plural number also include the plural or singular number, respectively, (c) the terms “hereof,” “herein,” “hereby” and derivative or similar words refer to this entire Agreement, (d) the terms “Article,” “Section,” “Annex” or “Exhibit” refer to the specified Article, Section, Annex or Exhibit of or to this Agreement, (e) the terms “include,” “includes” and “including” will be deemed to be followed by the words “without limitation” (whether or not so expressed), and (f) the word “or” is disjunctive but not exclusive. Whenever this Agreement refers to a number of days, such number will refer to calendar days unless business days are specified and whenever action must be taken (including the giving of notice or the delivery of documents) under this Agreement during a certain period of time or by a particular date that ends or occurs on a non-business day, then such period or date will be extended until the immediately following business day. As used herein, “business day” means any day other than Saturday, Sunday or a United States federal holiday.

22. Counterparts . This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original but all of which together shall constitute one and the same agreement.

[Signature page follows.]


IN WITNESS WHEREOF, Indemnitee has executed and the Company has caused its duly authorized representative to execute this Agreement as of the date first above written.

 

THE GORMAN-RUPP COMPANY
By:    
Name:  
Title:  

 

INDEMNITEE

 

Name:   First Name    Last Name
Address:   BD Mailing Address
  BD Mailing City,
  BD Mailing ST    BD Mailing ZIP

_


[FORM OF UNDERTAKING]

UNDERTAKING

 

STATE OF )
) SS:

COUNTY OF

)

I, ______________, being first duly sworn, do depose and say as follows:

1. This Undertaking is submitted pursuant to the Officer Indemnification Agreement, dated ___________, 2014, between The Gorman-Rupp Company, an Ohio corporation (the “Company”) and the undersigned.

2. I am requesting payment of Expenses that I have reasonably incurred or will reasonably incur in defending an Indemnifiable Claim referred to in the aforesaid Officer Indemnification Agreement.

3. The Expenses for which payment is requested are, in general, all expenses related to __________________.

4. I hereby undertake to repay all amounts paid pursuant hereto if it ultimately is determined that I am not entitled to be indemnified by the Company under the aforesaid Officer Indemnification Agreement or otherwise.

 

 

 

(Signature of Indemnitee)
[Indemnitee Name]

Subscribed and sworn to before me, a Notary Public in and for said County and State, this day of ______________, 20__.

 

 

 

[Seal]

My commission expires the ___________ day of ____________, 20__.

Exhibit 13

The Gorman-Rupp Company         Annual Report 2014

Report of Independent Registered

Public Accounting Firm

The Board of Directors and Shareholders of

The Gorman-Rupp Company

We have audited the accompanying consolidated balance sheets of The Gorman-Rupp Company as of December 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income, equity and cash flows for each of the three years in the period ended December 31, 2014. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Gorman-Rupp Company at December 31, 2014 and 2013, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), The Gorman-Rupp Company’s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework), and our report dated March 9, 2015 expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG LLP

Cleveland, Ohio

March 9, 2015

 

16


The Gorman-Rupp Company         Annual Report 2014

 

Consolidated Statements of Income

 

     Year ended December 31,  
(Thousands of dollars, except per share amounts)    2014     2013     2012  

Net sales

   $ 434,925      $ 391,665      $ 375,691   

Cost of products sold

     327,366        298,010        285,540   
  

 

 

   

 

 

   

 

 

 

Gross profit

     107,559        93,655        90,151   

Selling, general and administrative expenses

     54,254        51,734        47,968   
  

 

 

   

 

 

   

 

 

 

Operating income

     53,305        41,921        42,183   

Other income

     940        3,050        907   

Other expense

     (511     (694     (643
  

 

 

   

 

 

   

 

 

 

Income before income taxes

     53,734        44,277        42,447   

Income taxes

     17,593        14,173        14,244   
  

 

 

   

 

 

   

 

 

 

Net income

   $ 36,141      $ 30,104      $ 28,203   
  

 

 

   

 

 

   

 

 

 

Earnings per share

   $ 1.38      $ 1.15      $ 1.07   
  

 

 

   

 

 

   

 

 

 

Average number of shares outstanding

     26,256,824        26,249,324        26,242,366   

See notes to consolidated financial statements.

Consolidated Statements of Comprehensive Income

 

     Year ended December 31,  
(Thousands of dollars)    2014     2013     2012  

Net income

   $ 36,141      $ 30,104      $ 28,203   

Cumulative translation adjustments

     (3,276     (1,381     437   

Pension and postretirement medical liability adjustments, net of tax

     (5,589     9,202        (675
  

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income

     (8,865     7,821        (238
  

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 27,276      $ 37,925      $ 27,965   
  

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.

 

17


The Gorman-Rupp Company         Annual Report 2014

 

Consolidated Balance Sheets

 

     December 31,  
(Thousands of dollars)    2014      2013  

Assets

     

Current assets:

     

Cash and cash equivalents

   $ 24,491       $ 31,123   

Accounts receivable – net

     70,734         59,374   

Inventories – net:

     

Raw materials and in-process

     16,217         26,877   

Finished parts

     42,414         46,491   

Finished products

     36,129         16,578   
  

 

 

    

 

 

 
     94,760         89,946   

Deferred income taxes

     4,694         3,803   

Prepaid and other

     6,030         5,043   
  

 

 

    

 

 

 

Total current assets

     200,709         189,289   

Property, plant and equipment:

     

Land

     3,562         3,048   

Buildings

     100,943         96,775   

Machinery and equipment

     162,155         153,935   
  

 

 

    

 

 

 
     266,660         253,758   

Accumulated depreciation

     132,696         122,569   
  

 

 

    

 

 

 

Property, plant and equipment – net

     133,964         131,189   

Deferred income taxes and other

     6,313         3,657   

Goodwill and other intangible assets – net

     39,918         31,503   
  

 

 

    

 

 

 
   $ 380,904       $ 355,638   
  

 

 

    

 

 

 

See notes to consolidated financial statements.

 

18


The Gorman-Rupp Company         Annual Report 2014

 

     December 31,  
     2014     2013  

Liabilities and equity

    

Current liabilities:

    

Accounts payable

   $ 17,908      $ 17,882   

Short-term debt

     12,000        9,000   

Payroll and employee related liabilities

     11,355        11,020   

Commissions payable

     9,448        6,081   

Deferred revenue

     4,166        7,190   

Accrued expenses

     9,469        9,587   
  

 

 

   

 

 

 

Total current liabilities

     64,346        60,760   

Pension benefits

     4,496        —     

Postretirement benefits

     21,297        18,393   

Deferred and other income taxes

     8,798        12,345   
  

 

 

   

 

 

 

Total liabilities

     98,937        91,498   

Equity:

    

Common shares, without par value:

    

Authorized – 35,000,000 shares;

    

Outstanding – 26,260,543 shares in 2014 and 26,253,043 shares in 2013 (after deducting treasury shares of 788,253 in 2014 and 795,753 in 2013) at stated capital amount

     5,133        5,131   

Additional paid-in capital

     3,059        2,822   

Retained earnings

     291,101        264,648   

Accumulated other comprehensive loss

     (17,326     (8,461
  

 

 

   

 

 

 

Total equity

     281,967        264,140   
  

 

 

   

 

 

 
   $ 380,904      $ 355,638   
  

 

 

   

 

 

 

 

19


The Gorman-Rupp Company         Annual Report 2014

 

Consolidated Statements of Equity

 

(Thousands of dollars, except per share amounts)    Common
Shares
     Additional
Paid-In
Capital
     Retained
Earnings
    Accumulated
Other
Comprehensive
(Loss) Income
    Total  

Balances January 1, 2012

   $ 5,128       $ 2,544       $ 223,136      $ (16,044   $ 214,764   

Net income

           28,203          28,203   

Other comprehensive loss

             (238     (238

Issuance of 7,500 treasury shares

     2         149         27          178   

Cash dividends—$0.312 a share

           (8,188       (8,188
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balances December 31, 2012

     5,130         2,693         243,178        (16,282     234,719   

Net income

           30,104          30,104   

Other comprehensive income

             7,821        7,821   

Issuance of 7,500 treasury shares

     1         129         28          158   

Cash dividends—$0.330 a share

           (8,662       (8,662
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balances December 31, 2013

     5,131         2,822         264,648        (8,461     264,140   

Net income

           36,141          36,141   

Other comprehensive loss

             (8,865     (8,865

Issuance of 7,500 treasury shares

     2         237         27          266   

Cash dividends—$0.370 a share

           (9,715       (9,715
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balances December 31, 2014

   $ 5,133       $ 3,059       $ 291,101      $ (17,326   $ 281,967   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.

 

20


The Gorman-Rupp Company         Annual Report 2014

 

Consolidated Statements of Cash Flows

 

     Year ended December 31,  
(Thousands of dollars)    2014     2013     2012  

Cash flows from operating activities:

      

Net income

   $ 36,141      $ 30,104      $ 28,203   

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

      

Depreciation and amortization

     14,615        13,588        12,066   

Pension expense

     2,708        7,164        6,946   

Contributions to pension plan

     (2,500     (4,200     (7,200

Deferred income taxes

     (1,367     241        2,193   

Gain on sale of property, plant and equipment

     (343     (2,535     —     

Changes in operating assets and liabilities, net of effects of acquisitions:

      

Accounts receivable – net

     (8,529     (662     710   

Inventories – net

     (2,987     (48     (8,583

Accounts payable

     (693     2,985        (1,911

Commissions payable

     3,367        (1,487     (189

Deferred revenue

     (3,024     7,112        —     

Accrued expenses

     (3,700     6,947        4,727   

Benefit obligations and other

     (4,685     (8,823     (4,329
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     29,003        50,386        32,633   

Cash flows from investing activities:

      

Capital additions – net

     (13,275     (21,015     (16,373

Proceeds from sale of property, plant and equipment

     681        2,905        —     

(Purchases) redemptions of short-term investments

     (3     1        805   

Payments for acquisitions, net of cash acquired

     (16,667     —          (20,823
  

 

 

   

 

 

   

 

 

 

Net cash used for investing activities

     (29,264     (18,109     (36,391

Cash flows from financing activities:

      

Cash dividends

     (9,715     (8,662     (8,188

Proceeds from bank borrowings

     18,000        6,000        17,000   

Payments to bank for borrowings

     (15,000     (19,000     (5,000
  

 

 

   

 

 

   

 

 

 

Net cash (used for) provided by financing activities

     (6,715     (21,662     3,812   

Effect of exchange rate changes on cash

     344        389        (77
  

 

 

   

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (6,632     11,004        (23

Cash and cash equivalents:

      

Beginning of year

     31,123        20,119        20,142   
  

 

 

   

 

 

   

 

 

 

End of period

   $ 24,491      $ 31,123      $ 20,119   
  

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.

 

21


The Gorman-Rupp Company         Annual Report 2014

 

Notes to Consolidated Financial Statements

(Amounts in tables in thousands of dollars)

Note A – Summary of Significant Accounting Policies

General Information and Basis of Presentation

The Gorman-Rupp 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 consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles and include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated. Earnings per share are calculated based on the weighted-average number of common shares outstanding.

Cash Equivalents and Short-Term Investments

The Company considers highly liquid instruments with maturities of 90 days or less to be cash equivalents. The Company periodically makes short-term investments for which cost approximates fair value. Short-term investments at December 31, 2014 and 2013 consist primarily of certificates of deposit and are classified as prepaid and other on the consolidated balance sheets.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable are stated at the historical carrying amount net of allowance for doubtful accounts. The Company maintains an allowance for doubtful accounts for estimated losses from the failure of its customers to make required payments for products delivered. The Company estimates this allowance based on knowledge of the financial condition of customers, review of historical receivables and reserve trends and other relevant information.

Inventories

Inventories are stated at the lower of cost or market. The costs for approximately 75% of inventories at December 31, 2014 and 76% of inventories at December 31, 2013 are determined using the last-in, first-out (LIFO) method, with the remainder determined using the first-in, first-out method (FIFO). Cost components include materials, inbound freight costs, labor and allocations of fixed and variable overheads on an absorption costing basis.

Long-Lived Assets

Property, plant and equipment are stated on the basis of cost. Repairs and maintenance costs are expensed as incurred. Depreciation for property, plant and equipment and amortization for finite-lived intangible assets are computed by the straight-line method over the estimated useful lives of the assets and are included in cost of

products sold and selling, general and administrative expenses based on the use of the assets. Depreciation expense was $13.2 million, $12.4 million and $11.2 million during 2014, 2013 and 2012, respectively.

Depreciation of property, plant and equipment is determined based on the following lives:

 

Buildings

     20-50 years   

Machinery and equipment

     5-15 years   

Software

     3-5 years   

Amortization of finite-lived intangible assets is determined based on the following lives:

 

Technology and drawings

     13-20 years   

Customer relationships

     9-15 years   

Other intangibles

     2-18 years   

Long-lived assets, except goodwill and indefinite-lived intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount may not be recovered through future net cash flows generated by the assets. Impairment losses may be recorded when the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amounts based on the excess of the carrying amounts over the estimated fair value of the assets.

Goodwill and Indefinite-Lived Intangible Assets

Goodwill and other indefinite-lived intangible assets are not amortized but are reviewed annually for impairment as of October 1 or whenever events or changes in circumstances indicate there may be a possible permanent loss of value using either a quantitative or qualitative analysis. The Company uses a market-based approach to estimate the fair value of our reporting units and performed a quantitative analysis using a discounted cash flow model and other valuation techniques, but may elect to perform a qualitative analysis.

For 2014, the Company used a quantitative analysis for substantially all of its goodwill impairment testing under which the fair value for each reporting unit was estimated using a discounted cash flow model, which considered forecasted cash flows discounted at an estimated weighted-average cost of capital. The forecasted cash flows were based on the Company’s long-term operating plan and a terminal value was used to estimate the cash flows beyond the period covered by the operating plan. The weighted-average cost of capital is an estimate of the overall after-tax rate of return required by equity and debt market holders of a business enterprise. These analyses require the exercise of significant judgments, including judgments about appropriate discount rates, perpetual growth rates and the timing of expected future cash flows. Sensitivity analyses were performed around these assumptions in order to assess the reasonableness of

 

 

22


The Gorman-Rupp Company         Annual Report 2014

 

the assumptions and the resulting estimated fair values. For 2014, based on the quantitative analysis, the fair values of the Company’s reporting units continue to exceed the respective carrying amounts.

A qualitative analysis may be performed by assessing certain trends and factors, including projected market outlook and growth rates, forecasted and actual sales and operating profit margins, discount rates, industry data and other relevant qualitative factors. These trends and factors are compared to, and based on, the assumptions used in the most recent quantitative assessment.

Indefinite-lived intangible assets primarily consist of trademarks and trade names. The fair value of these assets is determined using a royalty relief methodology similar to that employed when the associated assets were acquired, but using updated estimates of future sales, cash flows and profitability. For 2014 and 2013, the fair value of indefinite lived intangible assets exceeded their carrying value.

For additional information about goodwill and other intangible assets, see Note H.

Revenue Recognition

The Company’s revenues from product sales are recognized when all of the following criteria are met: persuasive evidence of a sale arrangement exists, the price is fixed or determinable, product delivery has occurred or services have been rendered, there are no further obligations to customers and collectability is probable. Product delivery occurs when the risks and rewards of ownership and title pass, which normally occurs upon shipment to the customer.

Concentration of Credit Risk

The Company generally does not require collateral from its customers and has a very good collection history. There were no sales to a single customer that exceeded 10% of total net sales for the years ended December 31, 2014, 2013 or 2012.

Shipping and Handling Costs

The Company classifies all amounts billed to customers for shipping and handling as revenue and reflects related shipping and handling costs in cost of products sold.

Advertising

The Company expenses all advertising costs as incurred, which for the years ended December 31, 2014, 2013 and 2012 totaled $3.5 million, $3.4 million and $3.5 million, respectively.

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 warranty liability are:

 

     2014     2013     2012  

Balance at beginning of year

   $ 1,170      $ 1,133      $ 1,228   

Provision

     1,607        1,220        1,394   

Claims

     (1,611     (1,183     (1,489
  

 

 

   

 

 

   

 

 

 

Balance at end of year

   $ 1,166      $ 1,170      $ 1,133   
  

 

 

   

 

 

   

 

 

 

Foreign Currency Translation

Assets and liabilities of the Company’s operations outside the United States which are accounted for in a functional currency other than U.S. dollars are translated into U.S. dollars using year-end exchange rates. Revenues and expenses are translated at weighted-average exchange rates effective during the year. Foreign currency translation gains and losses are included as a component of accumulated other comprehensive loss within equity.

Gains and losses resulting from foreign currency transactions, the amounts of which are not material, are included in net income.

Fair Value

The carrying value of cash and cash equivalents, accounts receivable, accounts payable and short-term debt approximates their fair value.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Reclassification

Certain amounts for 2013 have been reclassified to conform to the 2014 presentation.

New Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board issued ASU 2014-09, “ Revenue from Contracts with Customers ,” which supersedes most current revenue recognition guidance, including industry-specific guidance, and requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. ASU 2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and is to be applied retrospectively, with early application not permitted. The Company currently does not expect the adoption of ASU 2014-09 to have a material impact on its consolidated financial statements.

 

 

23


The Gorman-Rupp Company         Annual Report 2014

Notes to Consolidated Financial Statements

(Amounts in tables in thousands of dollars)

 

Note B – Allowance for Doubtful Accounts

The allowance for doubtful accounts was $474,000 and $498,000 at December 31, 2014 and 2013, respectively.

Note C – Inventories

Inventories are stated at the lower of cost or market. Replacement cost approximates current cost and the excess over LIFO cost is approximately $57.9 million and $55.3 million at December 31, 2014 and 2013, respectively. Allowances for excess and obsolete inventory totaled $4.6 million and $3.8 million at December 31, 2014 and 2013, respectively.

Note D – Financing Arrangements

On May 30, 2014, the Company borrowed $18.0 million under an unsecured bank loan agreement to finance the asset acquisition of Bayou City Pump, Inc. The loan bears interest at LIBOR plus 0.75%, adjustable and payable monthly, and, with annual renewal, matures in August 2015. At December 31, 2014, $12.0 million was outstanding on the loan.

On December 6, 2013, the Company borrowed $6.0 million in a promissory note for the purchase of equipment. The loan bears interest at LIBOR plus 0.75%, adjustable and payable monthly, and was paid in full at December 31, 2014.

On December 17, 2012, the Company borrowed $17.0 million under an unsecured bank loan agreement to finance the asset acquisition of American Turbine. The loan bears interest at LIBOR plus 0.75%, adjustable and payable monthly, and, with annual renewal, matures in August 2015. During 2014, the remaining balance of $3.0 million was paid in full.

The Company may borrow up to $20.0 million with interest at LIBOR plus 0.75% or at alternative rates as selected by the Company under an unsecured bank line of credit which matures in August 2015. At December 31, 2014 and 2013, $20.0 million was available for borrowing.

The Company also has a $10.0 million unsecured bank line of credit with interest at LIBOR plus 0.75% payable monthly which matures in May 2015. At December 31, 2014 and 2013, $6.0 million was available for borrowing after deducting $4.0 million in outstanding letters of credit.

The financing arrangements described above contain nominal restrictive covenants, including limits on additional borrowings and maintenance of certain operating and financial ratios. At December 31, 2014 and 2013, the Company was in compliance with all requirements.

Interest expense, which approximates interest paid, was $134,000, $146,000 and $122,000 in 2014, 2013 and 2012, respectively.

The Company has operating leases for certain offices, manufacturing facilities, land, office equipment and automobiles. Rental expense relating to operating leases was $1.1 million in 2014, 2013 and 2012.

The future minimum lease payments due under these operating leases as of December 31, 2014 are:

 

2015

    2016     2017     2018     2019     Thereafter     Total  
$ 871      $ 648      $ 332      $ 223      $ 3      $ 11      $ 2,088   

Note E – Accumulated Other Comprehensive Loss

The reclassifications out of accumulated other comprehensive loss as reported in the Consolidated Statements of Income are:

 

Pension and other post

retirement benefits:

   2014     2013     2012  

Recognized actuarial loss (a)

   $ 483      $ 1,357      $ 1,794   

Settlement loss (b)

     —          2,756        1,940   

Settlement loss (c)

     —          1,413        995   

Total before income tax

     483        5,526        4,729   

Income tax

     (177     (2,006     (1,494
  

 

 

   

 

 

   

 

 

 

Net of income tax

   $ 306      $ 3,520      $ 3,235   
  

 

 

   

 

 

   

 

 

 

 

(a) The recognized actuarial loss is included in the computation of net periodic benefit cost. See Note G for additional details.
(b) This portion of the settlement loss is included in cost of products sold in the Consolidated Statements of Income.
(c) This portion of the settlement loss is included in selling, general and administrative expenses in the Consolidated Statements of Income.

The components of accumulated other comprehensive loss as reported in the Consolidated Balance Sheets are:

 

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

Balance at January 1, 2012

  $ (118   $ (15,926   $ (16,044

Reclassifications adjustments

    —          4,729        4,729   

Current period credit (charge)

    437        (5,716     (5,279

Income tax benefit

    —          312        312   
 

 

 

   

 

 

   

 

 

 

Balance at December 31, 2012

    319        (16,601     (16,282

Reclassifications adjustments

    —          5,526        5,526   

Current period (charge) credit

    (1,381     8,925        7,544   

Income tax charge

    —          (5,249     (5,249
 

 

 

   

 

 

   

 

 

 

Balance at December 31, 2013

    (1,062     (7,399     (8,461

Reclassifications adjustments

    —          483        483   

Current period charge

    (3,276     (9,294     (12,570

Income tax benefit

    —          3,222        3,222   
 

 

 

   

 

 

   

 

 

 

Balance at December 31, 2014

  $ (4,338   $ (12,988   $ (17,326
 

 

 

   

 

 

   

 

 

 
 

 

24


The Gorman-Rupp Company         Annual Report 2014

 

Note F – Income Taxes

The components of income before income taxes are:

 

     2014      2013      2012  

United States

   $ 49,692       $ 40,374       $ 40,019   

Foreign countries

     4,042         3,903         2,428   
  

 

 

    

 

 

    

 

 

 

Total

   $ 53,734       $ 44,277       $ 42,447   
  

 

 

    

 

 

    

 

 

 

The components of income tax expense are:

 

     2014     2013     2012  

Current expense:

      

Federal

   $ 16,638      $ 12,159      $ 11,542   

Foreign

     946        792        (324

State and local

     1,376        981        1,021   
  

 

 

   

 

 

   

 

 

 
     18,960        13,932        12,239   
  

 

 

   

 

 

   

 

 

 

Deferred (benefit) expense:

      

Federal

     (1,181     108        2,109   

Foreign

     (114     (38     (189

State and local

     (72     171        85   
  

 

 

   

 

 

   

 

 

 
     (1,367     241        2,005   
  

 

 

   

 

 

   

 

 

 

Income tax expense

   $ 17,593      $ 14,173      $ 14,244   
  

 

 

   

 

 

   

 

 

 

The reconciliation between income tax expense and the amount computed by applying the statutory federal income tax rate of 35% to income before income taxes is:

 

     2014     2013     2012  

Income taxes at statutory rate

   $ 18,807      $ 15,497      $ 14,856   

State and local income taxes, net of federal tax benefit

     674        587        719   

Research and development tax credits

     (371     (740     —     

Domestic production activities deduction

     (1,324     (952     (980

Lower foreign taxes differential

     (583     (612     (528

Uncertain tax positions

     53        94        (236

Valuation allowance

     174        162        —     

Other

     163        137        413   
  

 

 

   

 

 

   

 

 

 

Income tax expense

   $ 17,593      $ 14,173      $ 14,244   
  

 

 

   

 

 

   

 

 

 

The Company made income tax payments of $19.4 million, $13.2 million and $12.0 million in 2014, 2013 and 2012, respectively.

Deferred income tax assets and liabilities consist of:

 

     2014     2013  

Deferred tax assets:

    

Inventories

   $ 1,030      $ 1,688   

Accrued liabilities

     2,538        2,341   

Postretirement health benefits obligation

     7,602        6,545   

Pension

     1,649        —     

Deferred revenue

     1,267        —     

Other

     550        101   
  

 

 

   

 

 

 

Total deferred tax assets

     14,636        10,675   

Valuation allowance

     (336     (162
  

 

 

   

 

 

 

Net deferred tax assets

     14,300        10,513   

Deferred tax liabilities:

    

Depreciation and amortization

     (17,711     (16,858

Pension

     —          (1,634
  

 

 

   

 

 

 

Total deferred tax liabilities

     (17,711     (18,492
  

 

 

   

 

 

 

Net deferred tax liabilities

   $ (3,411   $ (7,979
  

 

 

   

 

 

 

The Company has a valuation allowance as of December 31, 2014 of $336,000 against certain of its deferred tax assets. The comparable amount of valuation allowance at December 31, 2013 was $162,000. ASC 740 requires that a valuation allowance be recorded against deferred tax assets when it is more likely than not that some or all of a Company’s deferred tax assets will not be realized based on available positive and negative evidence.

At December 31, 2014, total unrecognized tax benefits were $576,000. Of the total, $452,000 of unrecognized tax benefits, if ultimately recognized, would reduce the Company’s annual effective tax rate.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

 

     2014     2013     2012  

Balance at beginning of year

   $ 516      $ 421      $ 1,423   

Additions based on tax positions related to the current year

     158        189        68   

Reduction for tax positions of prior years

     —          —          (1

Reductions due to lapse of applicable statute of limitations

     (98     (46     (131

Settlements

     —          (48     (938
  

 

 

   

 

 

   

 

 

 

Balance at end of year

   $ 576      $ 516      $ 421   
  

 

 

   

 

 

   

 

 

 
 

 

25


The Gorman-Rupp Company         Annual Report 2014

Notes to Consolidated Financial Statements

(Amounts in tables in thousands of dollars)

 

The Company is subject to income taxes in the U.S. federal and various state, local and foreign jurisdictions. Income tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for the years before 2011. The Company has $55,000 of unrecognized tax benefits recorded for periods which the relevant statutes of limitations expire in the next 12 months.

The Company has state tax credit carryforwards of $545,000 and $343,000 as of December 31, 2014 and 2013, respectively, set to expire between 2018 and 2025.

The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense for all periods presented. The Company accrued approximately $99,000, $85,000 and $91,000 for the payment of interest and penalties at December 31, 2014, 2013 and 2012, respectively.

The Company has not provided an estimate for any U.S. or additional foreign taxes on undistributed earnings of foreign subsidiaries that might be payable if these earnings were repatriated since the Company considers these amounts to be permanently invested. It is not practicable to estimate the additional income taxes and applicable withholding taxes that would be payable on remittance of such earnings.

In September 2013, the Internal Revenue Service issued final regulations governing the income tax treatment of acquisitions, dispositions, and repairs of tangible property. Taxpayers are required to follow the new regulations in taxable years beginning on or after January 1, 2014. The impact of the regulations is not material to the Company’s consolidated financial statements.

Note G – Pensions 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. Total contributions for the plans in 2014, 2013 and 2012 were $1.6 million, $1.3 million and $1.2 million, respectively.

The Company also sponsors a non-contributory defined benefit health care plan that provides health benefits to certain domestic and Canadian retirees and their spouses. The Company funds the cost of these benefits as incurred. For measurement purposes, and based on maximum benefits as defined by the plan, a zero percent annual rate of increase in the per capita cost of covered health care benefits for retirees age 65 and over was assumed for 2014 and is expected to remain constant going forward. A 5% rate of increase for retirees under age 65 was assumed.

The Company recognizes the obligations associated with its defined benefit pension plan and defined benefit health care plan in its consolidated financial statements. The following table presents the plans’ funded status as of the measurement date reconciled with amounts recognized in the Company’s consolidated balance sheets:

 

    Pension Plan     Postretirement Plan  
    2014     2013     2014     2013  

Accumulated benefit obligation at end of year

  $ 65,454      $ 57,632      $ 22,813      $ 19,794   

Change in projected benefit obligation:

       

Benefit obligation at beginning of year

  $ 70,635      $ 81,148      $ 19,794      $ 23,794   

Service cost

    2,904        3,144        907        1,153   

Interest cost

    2,895        2,851        845        724   

Settlement

    —          191        —          —     

Benefits paid

    (3,584     (11,371     (1,736     (1,370

Effect of foreign exchange

    —          —          (49     (68

Actuarial loss (gain)

    7,219        (5,328     3,052        (4,439
 

 

 

   

 

 

   

 

 

   

 

 

 

Benefit obligation at end of year

  $ 80,069      $ 70,635      $ 22,813      $ 19,794   
 

 

 

   

 

 

   

 

 

   

 

 

 

Change in plan assets:

       

Fair value of plan assets at beginning of year

  $ 70,889      $ 73,631      $ —        $ —     

Actual return on plan assets

    5,768        4,429        —          —     

Employer contributions

    2,500        4,200        1,736        1,370   

Benefits paid

    (3,584     (11,371     (1,736     (1,370
 

 

 

   

 

 

   

 

 

   

 

 

 

Fair value of plan assets at end of year

    75,573        70,889        —          —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Funded status at end of year

  $ (4,496   $ 254      $ (22,813   $ (19,794
 

 

 

   

 

 

   

 

 

   

 

 

 
 

 

26


The Gorman-Rupp Company         Annual Report 2014

 

     Pension
Plan
    Postretirement
Plan
 
     2014     2013     2014     2013  

Amounts recognized in the Consolidated Balance Sheets consist of:

        

Noncurrent assets

   $ —        $ 254      $ —        $ —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ —        $ 254      $ —        $ —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Current liabilities

   $ —        $ —        $ (1,516   $ (1,401

Noncurrent liabilities

     (4,496     —          (21,297     (18,393
  

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

   $ (4,496   $ —        $ (22,813   $ (19,794
  

 

 

   

 

 

   

 

 

   

 

 

 

Amounts recognized in accumulated other comprehensive loss consist of:

        

Net actuarial loss (gain)

   $ 28,836      $ 24,295      $ (7,601   $ (11,871

Deferred tax (benefit) expense

     (11,162     (9,496     2,915        4,471   
  

 

 

   

 

 

   

 

 

   

 

 

 

After tax actuarial loss (gain)

   $ 17,674      $ 14,799      $ (4,686   $ (7,400
  

 

 

   

 

 

   

 

 

   

 

 

 

 

Components of net periodic benefit cost:

      
     2014     2013     2012  

Pension Plan

      

Service cost

   $ 2,904      $ 3,144      $ 3,188   

Interest cost

     2,895        2,851        2,803   

Expected return on plan assets

     (4,755     (5,080     (4,591

Recognized actuarial loss

     1,664        2,080        2,441   

Settlement loss

     —          4,169        2,935   

Net periodic benefit cost

   $ 2,708      $ 7,164      $ 6,776   
  

 

 

   

 

 

   

 

 

 

Other changes in pension plan assets and benefit obligations recognized in other comprehensive loss:

      

Net loss (gain)

   $ 4,541      $ (10,734   $ 1,371   
  

 

 

   

 

 

   

 

 

 

Total expense (income) recognized in net periodic benefit cost and other comprehensive income

   $ 7,249      $ (3,570   $ 8,147   
  

 

 

   

 

 

   

 

 

 

Postretirement Plan

      

Service cost

   $ 907      $ 1,153      $ 1,156   

Interest cost

     845        724        871   

Recognized actuarial gain

     (1,181     (723     (647
  

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 571      $ 1,154      $ 1,380   

Other changes in post retirement plan assets and benefit obligations recognized in other comprehensive loss:

      

Net loss (gain)

   $ 4,233      $ (3,717   $ (384
  

 

 

   

 

 

   

 

 

 

Total expense (income) recognized in net periodic benefit cost and other comprehensive income

   $ 4,804      $ (2,563   $ 996   
  

 

 

   

 

 

   

 

 

 

During 2013 and 2012, the Company recorded settlement losses relating to retirees that received lump-sum distributions from the Company’s defined benefit pension plan totaling $4.2 million and $2.9 million, respectively. These charges were the result of lump-sum payments to retirees which exceeded the plan’s actuarial service and interest cost thresholds in each of 2013 and 2012. The cost threshold was not exceeded in 2014.

The prior service cost is amortized on a straight-line basis over the average estimated remaining service period of active participants. The unrecognized actuarial gain or loss in excess of the greater of 10% of the benefit obligation or the market value of plan assets is also amortized on a straight-line basis over the average estimated remaining service period of active participants.

 

     Pension
Benefits
    Postretirement
Benefits
 
     2014     2013     2014     2013  

Weighted-average assumptions used to determine benefit obligations at December 31:

        

Discount rate

     3.45     4.30     3.60     4.50

Rate of compensation increase

     3.50     3.50     —          —     

Weighted-average assumptions used to determine net periodic benefit cost for years ended December 31:

        

Discount rate

     4.30     4.30     4.50     3.20

Expected long-term rate of return on plan assets

     7.00     7.00     —          —     

Rate of compensation increase

     3.50     3.50     —          —     

To enhance the Company’s efforts to mitigate the impact of the defined benefit pension plan on its financial statements, the Company has moved towards a liability driven investing model to more closely align assets with liabilities based on when the liabilities are expected to come due. Currently, based on 2014 funding levels, equities may comprise between 14% to 34% of the Plan’s market value. Fixed income investments may comprise between 60% to 80% of the Plan’s market value. Alternative investments may comprise between 0% to 12% of the Plan’s market value. Cash and cash equivalents (including all senior debt securities with less than one year to maturity) may comprise between 0% to 10% of the Plan’s market value.

Financial instruments included in pension plan assets are categorized into a fair value hierarchy of three levels, based on the degree of subjectivity inherent in the valuation methodology. Level 1 assets are based on unadjusted quoted prices in active markets that are accessible to the reporting entity at the measurement date for identical assets. Level 2 assets are valued at inputs other than quoted prices in

 

 

27


The Gorman-Rupp Company         Annual Report 2014

Notes to Consolidated Financial Statements

(Amounts in tables in thousands of dollars)

 

active markets for identical assets that are observable either directly or indirectly for substantially the full term of the assets. Level 3 assets are valued based on unobservable inputs for the asset (i.e., supported by little or no market activity). These inputs include management’s own assessments about the assumptions that market participants would use in pricing assets (including assumptions about risk). The level in the fair value hierarchy within which the fair value measurement is classified is determined based on the lowest level input that is significant to the fair value measure in its entirety. All of the Plan’s assets are in level 1 or level 2 within the fair value hierarchy and the following table sets forth by asset class the Plan’s fair value of assets.

Plan fair value asset allocation by category:

 

2014

   $      %  

Level 1

     

Equity

   $ 17,819         23

Fixed Income

     2,169         3

Mutual Funds

     3,598         5

Money Fund and Cash

     1,901         3
  

 

 

    

 

 

 

Total Level 1

     25,487         34

Level 2

     

Fixed Income

     47,716         63

Money Fund

     2,362         3
  

 

 

    

 

 

 

Total Level 2

     50,078         66

Level 3

     

Total Level 3

     —           —     
  

 

 

    

 

 

 

Total fair value of Plan assets

   $ 75,565         100
  

 

 

    

 

 

 

2013

   $      %  

Level 1

     

Equity

   $ 21,795         31

Fixed Income

     919         1

Mutual Funds

     5,031         7

Money Fund and Cash

     2,133         3
  

 

 

    

 

 

 

Total Level 1

     29,878         42

Level 2

     

Fixed Income

     35,540         50

Money Fund

     5,471         8
  

 

 

    

 

 

 

Total Level 2

     41,011         58

Level 3

     

Total Level 3

     —           —     
  

 

 

    

 

 

 

Total fair value of Plan assets

   $ 70,889         100
  

 

 

    

 

 

 

Contributions

Although not required to make pension contributions in 2015, the Company may elect to contribute $2.0 million to $4.0 million to its pension plan in 2015.

Expected future benefit payments

The following benefit payments are expected to be paid as follows based on actuarial calculations:

 

    2015     2016     2017     2018     2019     Thereafter  

Pension

  $ 5,095      $ 5,319      $ 7,044      $ 6,089      $ 6,366      $ 30,780   

Postretirement

    1,543        1,576        1,612        1,695        1,781        8,957   

A one percentage point increase in the assumed health care trend rate would increase postretirement expense by approximately $201,000, changing the benefit obligation by approximately $2.2 million; while a one percentage point decrease in the assumed health care trend rate would decrease postretirement expense by approximately $185,000, changing the benefit obligation by approximately $1.9 million. The assumed trend rates for healthcare costs are a 5% increase per year for retirees prior to the age 65 and 0% for retirees post age 65.

A one percentage point change in the assumed rate of return on the defined benefit pension plan assets is estimated to have an approximate $679,000 effect on pension expense. Additionally, a one percentage point increase in the discount rate is estimated to have a $1.4 million decrease in pension expense, while a one percentage point decrease in the discount rate is estimated to have a $1.6 million increase in pension expense.

Note H – Goodwill and Other Intangible Assets

Changes in the carrying value of goodwill during the years ended December 31, 2014 and 2013 are as follows:

 

     Goodwill  

Balance at January 1, 2013

   $ 17,452   

Acquisition

     999   

Foreign currency

     (405
  

 

 

 

Balance at December 31, 2013

     18,046   

Acquisition

     4,725   

Foreign currency

     (156
  

 

 

 

Balance at December 31, 2014

   $ 22,615   
  

 

 

 

The major components of goodwill and other intangible assets are:

 

    2014     2013  
    Historical
Cost
    Accumulated
Amortization
    Historical
Cost
    Accumulated
Amortization
 

Finite-lived intangible assets:

       

Customer relationships

  $ 12,175      $ 3,372      $ 8,170      $ 2,403   

Technology & drawings

    6,620        2,035        5,790        1,685   

Other intangibles

    1,544        1,517        1,568        1,505   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total finite-lived intangible assets

    20,339        6,924        15,528        5,593   

Goodwill

    22,615        —          18,046        —     

Trade names & trademarks

    3,888        —          3,522        —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 46,842      $ 6,924      $ 37,096      $ 5,593   
 

 

 

   

 

 

   

 

 

   

 

 

 
 

 

28


The Gorman-Rupp Company         Annual Report 2014

 

Amortization of intangible assets in 2014, 2013 and 2012 was $1.4 million, $1.2 million and $869,000, respectively. Amortization of these intangible assets for 2015 through 2019 is expected to approximate $1.2 million per year.

Note I – Business Segment Information

The Company operates in one business segment comprising the design, manufacture and sale of pumps and pump systems. The Company’s products are used in water, wastewater, construction, industrial, petroleum, original equipment, agriculture, fire protection, heating, ventilation and air conditioning (HVAC), military and other liquid-handling applications.

The pumps and pump systems are marketed in the United States and worldwide through a network of more than 1,000 distributors, through manufacturers’ representatives (for sales to many original equipment manufacturers), through third-party distributor catalogs and by direct sales. International sales are made primarily through foreign distributors and representatives.

The Company sells to nearly 150 countries around the world. Company sales, determined by customer location were:

 

     2014      %      2013      %      2012      %  

United States

   $ 298,338         69       $ 257,038         66       $ 239,153         64   

Foreign countries

     136,587         31         134,627         34         136,538         36   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 434,925         100       $ 391,665         100       $ 375,691         100   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net sales from external customers by product category are:

 

     2014      2013      2012  

Pumps and pump systems

   $ 379,626       $ 336,779       $ 318,235   

Repairs of pumps and pump systems and other

     55,299         54,886         57,456   
  

 

 

    

 

 

    

 

 

 

Total

   $ 434,925       $ 391,665       $ 375,691   
  

 

 

    

 

 

    

 

 

 

As of December 31, 2014 and 2013, 95% and 96% of the Company’s long-lived assets were located in the United States, respectively.

Note J – Acquisitions

In June 2014, the Company, through its wholly owned subsidiary National Pump Company, acquired substantially all of the assets and certain liabilities of Bayou City Pump, Inc. (“BCP”). Founded in 1973, BCP is a leading manufacturer of and service provider for highly-reliable and energy-efficient vertical turbine pumping systems primarily for the inland and coastal marine liquid petroleum and chemical transportation

market. BCP has steadily expanded its product designs and service capabilities in recent years to become a significant market share provider in North American marine transportation. BCP also has developed and manufactures a specialty sludge pumping system for use in a variety of industrial applications. BCP’s strong customer relationships and long history will help expand sales in targeted niche markets complementary to National Pump Company’s significant and growing vertical turbine products leadership position. In addition, its Houston, Texas base will provide additional capacity and machining capabilities in combination with National Pump’s existing location acquired late in 2012, which together will assist The Gorman-Rupp Company in expanding its growing Gulf Coast Operations.

The Company recognized customer relationships of $4.1 million, technology and drawings of $830,000, tradenames and trademarks of $370,000 and goodwill of $4.7 million related to the asset acquisition of Bayou City Pump, Inc.

The results of operations of the acquired business have been included in Gorman-Rupp’s consolidated results since June 2014. Supplemental pro forma information has not been provided as the acquisition did not have a material impact on the Company’s consolidated results of operations.

In December 2012, the Company’s wholly owned subsidiary, National Pump Company, acquired substantially all of the assets and certain liabilities of American Turbine. Founded in 1975, American Turbine is a group of companies that collectively are a leading manufacturer and distributor of energy-efficient vertical turbine and submersible pumps primarily serving agricultural, municipal and industrial markets, both domestically and globally.

In September 2012, the Company’s wholly owned subsidiary, Gorman-Rupp Africa Proprietary Limited (“GR Africa”), purchased the business of Pumptron (Proprietary) Limited (“Pumptron”) through internally generated cash flows. Prior to its acquisition, Pumptron was an international value-added distributor for Gorman-Rupp for over 25 years. Founded in 1986, Pumptron is a leading provider of water-related pumping solutions primarily serving the construction, mining, agricultural and municipal markets in South Africa and increasingly throughout other sub-Sahara African countries. Pumptron is headquartered in Johannesburg with operating locations in Cape Town and Durban, all in South Africa.

 

 

29


The Gorman-Rupp Company         Annual Report 2014

 

Management’s Discussion and Analysis

 

Executive Overview

The following discussion of Results of Operations includes certain non-GAAP financial data, and measures such as earnings before interest, taxes, depreciation and amortization. The adjusted gross margins, operating margins and earnings per share amounts exclude non-cash pension settlement charges as a result of lump sum payments related to the defined benefit pension plan. 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 will be useful to investors as well as to assess the continuing strength of the Company’s underlying operations.

The Gorman-Rupp 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 develops initiatives to improve performance in these key areas.

Gorman-Rupp actively pursues growth opportunities through organic growth, international business expansion and acquisitions.

We continually invest in training for our employees, new product development and modern manufacturing equipment, technology and facilities designed to increase production efficiency and capacity and drive growth by delivering innovative solutions to our customers. We believe the diversity of our markets is a major contributor to the 80 plus years of stability of our financial growth.

The Company achieved record sales and earnings during 2014 and attained its forty-second consecutive year of increased cash dividends paid to shareholders. Operating results for 2014 include Bayou City Pump Company for seven months, after being acquired at the beginning of June 2014.

The Company places a strong emphasis on cash flow generation and having excellent liquidity and financial flexibility. This focus has afforded us the continuing ability to reinvest our cash resources and preserve a strong balance sheet to position us for future opportunities. The $112.0 million of cash generated by operating activities over the past three years was utilized primarily to fund growth-oriented acquisitions and productivity-enhancing capital expenditures, pay dividends, substantially repay acquisitions-related short-term debt and significantly fund the Company’s defined benefit pension plan.

The Company generated $68.5 million in earnings before interest, taxes, depreciation and amortization during 2014. From these earnings, we invested $13.3 million in buildings and machinery and equipment and returned $9.7 million in dividends to shareholders.

Capital additions in 2015 are expected to be $18.0 to $20.0 million. Approximately $2.5 million are for facilities expansion in the United States and $3.5 million are for facilities expansion in Ireland. The remaining $12.0 to $14.0 million are planned for new production equipment to replace aging equipment.

On January 22, 2015, the Board of Directors authorized the payment of a quarterly dividend of $0.10 per share, representing the 260th consecutive quarterly dividend to be paid by the Company. During 2014, the Company again paid increased dividends and thereby attained its forty-second consecutive year of increased dividends. These consecutive years place Gorman-Rupp in the top 50 of all U.S. public companies with respect to number of consecutive years of increased dividend payments. The dividend yield at December 31, 2014 was 1.15%.

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,

 

 

30


The Gorman-Rupp Company         Annual Report 2014

 

dependent on our assessment of the Company’s financial condition and business outlook at the applicable time.

We are pleased with Patterson Pump Company’s performance on the PCCP project for which shipments of the large flood control pumps for New Orleans began this year and will be an even larger contributor in 2015. When completed, this flood control project will be one of the largest such projects in the world. Also, 2015 results will include a complete year of our Bayou City Pump Company acquisition which adds market diversity for our petroleum handling products and services.

Outlook

Most of the markets we serve have improved since the economic downturn in 2008 and 2009 as the U.S. economy has steadily recovered from the recession. However, uncertain business, global regulatory and economic conditions still persist and continue to be a negative influence on capital goods investment. These uncertainties have caused variations in some of our markets we serve and may continue to do so in the near and longer term. In particular, the recent dramatic decline in the price of oil may have a negative impact in the near term on some of the markets we serve such as construction, including rental equipment, and fire protection markets. Also, there may be additional headwinds for 2015 due to continuing unfavorable exchange rate alignments compounded by ongoing international economic uncertainties.

Generally we believe that the Company is well positioned to grow organically at reasonably comparable sales pace and operating margins over the long term by expanding our customer base, both domestically and globally, and through new product offerings. We expect that the increasing need for water and wastewater infrastructure rehabilitation within the United States, and similar needs internationally, including in emerging economies, along with increasing demand for pumps and pump systems for industrial and agricultural applications, will provide excellent growth opportunities for Gorman-Rupp in the future.

Results of Operations – 2014 Compared to 2013:

The Company attained record net sales of $434.9 million in 2014 compared to net sales of $391.7 million in 2013, an increase of $43.3 million or 11.0% . Sales improved 10.4% in our larger water markets group and 12.5% in our non-water markets.

Major contributors to the increase included a $20.0 million increase in the municipal market driven by sales of large volume pumps for wastewater and flood control, a $13.3 million increase in the industrial market related to fracking, $8.5 million from the recent acquisition of Bayou City Pump Company and an increase of $6.1 million in the construction market principally for pumps for rental businesses and oil and gas drilling support within North America. In addition, sales in the fire protection market increased $3.8 million primarily due to domestic sales. These increases were partially offset by a $4.3 million decrease in the agriculture market due to wet weather conditions in several domestic regions.

International sales were $136.6 million in 2014 compared to $134.6 million in 2013, a slight increase of $2.0 million or 1.5% from the prior year. Excluding the impact of the change in foreign exchange rates, international sales were up $4.3 million or 3.2% . International sales represented 31% and 34% of total sales for the Company in 2014 and 2013, respectively. Sales continued to be softer in Europe due to sluggish economic conditions.

The Company’s backlog of orders was $160.7 million at December 31, 2014 compared to $182.2 million a year ago and $170.0 million at September 30, 2014. The decrease in backlog from a year ago is principally due to record shipments during 2014, including approximately $14.4 million related to the PCCP flood control project in New Orleans. Approximately 95% of the Company’s backlog of unfilled orders at December 31, 2014 is scheduled to be shipped during 2015.

Cost of products sold in 2014 was $327.4 million compared to $298.0 million in 2013, an increase of $29.4 million or 9.9% . Gross profit was $107.6 million in 2014 compared to $93.7 million

 

 

31


The Gorman-Rupp Company         Annual Report 2014

 

Management’s Discussion and Analysis

 

in 2013, an increase of 14.8% resulting in gross margins of 24.7% and 23.9% in 2014 and 2013, respectively. The gross margin for 2013 was reduced by 70 basis points due to a non-cash pension settlement charge which did not recur in 2014.

Selling, general and administrative (“SG&A”) expenses for 2014 were $54.3 million, or 12.5% of net sales, compared with $51.7 million, or 13.2% of net sales for 2013. The decrease in SG&A expenses as a percent of sales was primarily due to leverage generated by the record sales volume during 2014.

Operating income in 2014 was a record $53.3 million compared to $41.9 million in 2013, resulting in operating margins of 12.3% and 10.7%, respectively. The operating margin for 2013 was reduced by 110 basis points due to a non-cash pension settlement charge which did not recur in 2014.

Other income in 2014 was $940,000 compared to $3.1 million in 2013. Other income in 2013 included a gain on sale of property, plant and equipment of $2.5 million.

The effective income tax rate was 32.7% in 2014 compared to 32.0% in 2013. The difference in the effective tax rate was primarily due to the federal research and development tax credit that was not enacted for 2012 until January 2013, and thus not permitted to be recorded until 2013 for 2012. Therefore, two years of the research and development tax credit were recognized in 2013.

Net income for 2014 was a record $36.1 million compared to $30.1 million in 2013, an increase of $6.0 million or 20.1% . As a percent of net sales, net income was 8.3% and 7.7% in 2014 and 2013, respectively.

Earnings per share were $1.38 in 2014 compared to $1.15 in 2013, an increase of $0.23 per share or 20.0% . Earnings per share for 2013 included a reduction of $0.10 due to non-cash pension settlement charges offset by $0.06 per share of gain on the sale of property, plant and equipment, both of which did not recur in 2014. Currency translation negatively impacted earnings in 2014 by $0.01 per share.

Results of Operations – 2013 Compared to 2012:

The Company attained then-record net sales of $391.7 million in 2013 compared to net sales of $375.7 million in 2012, an increase of $16.0 million or 4.3% . Major contributors to the increase included an $8.7 million increase in fire pump shipments in the U.S. due to some increases in large building construction, a $7.8 million increase in the agriculture market for irrigation pumps, due to a 2012 acquisition, and an increase of $5.2 million in the municipal market, partially offset by an $8.4 million decrease in the construction market when compared to the strong fracking market early in 2012.

International sales were $134.6 million in 2013 compared to a record $136.5 million in 2012, a slight decrease of $1.9 million or 1.4% from the prior year. International sales represented 34.4% and 36.3% of total sales for the Company in 2013 and 2012, respectively. Sales were somewhat softer in Europe due to the deteriorating economic conditions compared to 2012.

The Company’s backlog of orders was $182.2 million at December 31, 2013 compared to $143.4 million a year ago and $190.7 million at September 30, 2013. Approximately 77% of the Company’s backlog of unfilled orders at December 31, 2013 is scheduled to be shipped during 2014, lower than previous years’ percentages due to some of the Permanent Canal Closures and Pumps project that is expected to ship through the first three quarters of 2015.

Cost of products sold in 2013 was $298.0 million compared to $285.5 million in 2012, an increase of $12.5 million or 4.4% . Gross profit was $93.7 million in 2013 compared to $90.2 million in 2012, an increase of 3.9% resulting in gross margins of 23.9% and 24.0% in 2013 and 2012, respectively. Excluding the non-cash pension settlement charges, gross margin would have been 24.6% and 24.5% in 2013 and 2012, respectively.

SG&A expenses for 2013 were $51.8 million, or 13.2% of net sales, compared with $48.0 million, or 12.8% of net sales for 2012. The increase in SG&A expenses was primarily driven by the inclusion of

 

 

32


The Gorman-Rupp Company         Annual Report 2014

 

wages and benefits for a full year related to two acquisitions that were made during the latter part of 2012.

Operating income in 2013 was $41.9 million compared to $42.2 million in 2012, resulting in operating margins of 10.7% and 11.2%, respectively. Excluding the non-cash pension settlement charges described above, operating margins would have been 11.4% and 12.0% for 2013 and 2012, respectively.

Other income in 2013 was $3.1 million compared to $907,000 in 2012. The increase in other income during 2013 was principally due to gain on sale of property, plant and equipment of $2.5 million.

The effective income tax rate was 32.0% in 2013 compared to 33.6% in 2012. The difference in the effective tax rate was primarily due to the federal research and development tax credit that was not enacted for 2012 until January 2013, and thus not permitted to be recorded until 2013 for 2012. Therefore, two years of the research and development tax credit were recognized in 2013.

Net income for 2013 was a then-record $30.1 million compared to $28.2 million in 2012, an increase of $1.9 million or 6.7% . The non-cash pension settlement charges reduced net income by $2.8 million and $1.9 million in 2013 and 2012, respectively. Net income excluding the charges would have been $32.9 million in 2013 and $30.1 million in 2012. As a percent of net sales, net income was 7.7% and 7.5% in 2013 and 2012, respectively. Excluding the pension settlement charges, net income would have been 8.4% and 8.0% in 2013 and 2012, respectively.

Earnings per share were $1.15 in 2013 compared to $1.07 in 2012, an increase of $0.08 per share or 7.5% . The non-cash pension settlement charges reduced net income by $0.10 in 2013 and $0.08 per share in 2012, which would have resulted in earnings per share of $1.25 in 2013 and $1.15 in 2012.

Trends

The Company does not believe that it is exposed to material market risks as a result of its export sales or operations outside of the United States. Approximately 70% of the Company’s international sales are export sales from the United States. Export sales are denominated predominately in U.S. dollars and made on open account or with letters of credit.

For more than 10 years, numerous business entities in the pump and fluid-handling industries, as well as a multitude of companies in many other industries, have been targeted in a series of lawsuits in several jurisdictions by various individuals seeking redress to claimed injury as a result of the entities’ alleged use of asbestos in their products. The Company and one of its subsidiaries remain drawn into mass-scale asbestos-related litigation, typically as one of many co-defendants in a particular proceeding; the majority of these cases are against Patterson Pump Company. The allegations in the lawsuits involving the Company and/or Patterson Pump Company are vague, general and speculative, and most cases have not advanced beyond the early stage of discovery. In certain situations, the plaintiffs have voluntarily dismissed the Company and/or Patterson Pump Company from some of the lawsuits after the plaintiffs have acknowledged that there is no basis for their claims. In other situations, the Company and/or Patterson Pump Company have been dismissed from some of the lawsuits as a result of court rulings in favor of motions to dismiss and/or motions for summary judgment. In one hundred cases the Company has entered into nominal economic settlements recommended for payment by its insurers, coupled with dismissal of the lawsuits. Insurers of the Company have engaged legal counsel to represent the Company and its subsidiaries and to protect their interests. Management does not currently believe that the small number of legal proceedings arising out of the ordinary course of business, or the industry-wide asbestos litigation, will materially impact the Company’s consolidated results of operations, liquidity or financial condition.

 

 

33


The Gorman-Rupp Company         Annual Report 2014

 

Management’s Discussion and Analysis

 

Liquidity and Sources of Capital

Cash and cash equivalents totaled $24.5 million and there was $12.0 million in outstanding bank debt at December 31, 2014. In addition, the Company had $26.0 million available in bank lines of credit after deducting $4.0 million in outstanding letters of credit primarily related to customer orders. The Company was in compliance with its nominal restrictive covenants, including limits on additional borrowings and maintenance of certain operating and financial ratios, at all times in 2014 and 2013.

Capital expenditures for 2015, consisting principally of building expansions and machinery and equipment purchases, are estimated to be in the range of $18.0 to $20.0 million and are expected to be financed through internally generated funds and existing lines of credit. During 2014, 2013 and 2012, the Company financed its capital improvements and working capital requirements principally through internally generated funds.

Working capital increased 6.1% to $136.4 million at December 31, 2014 compared to $128.5 million a year ago, largely due to accounts receivable related to increased sales volume and some completed inventory related to some customer-delayed shipments at December 31, 2014.

Earnings before interest, income taxes and depreciation and amortization, were $68.5 million for 2014, $58.0 million for 2013 and $54.6 million in 2012. Net of capital expenditures, these amounts were $55.2 million, $37.0 million and $38.2 million, respectively. Additionally, net of dividends, these amounts were $45.5 million, $28.3 million and $30.1 million, respectively.

Financial Cash Flow

Net cash provided by operating activities was $29.0 million, $50.4 million and $32.6 million for 2014, 2013 and 2012, respectively. The change in cash provided by operating activities in 2014 compared to 2013 was primarily due to recognition of deferred revenue relating to the PCCP project and increased accounts receivable. The change in cash provided by operating activities in 2013 compared to 2012 was primarily due to increased deferred revenue relating to the PCCP project and change in inventory balances.

Cash used for investing activities was $29.3 million, $18.1 million and $36.4 million for 2014, 2013 and 2012, respectively. Net cash paid for acquisitions was $16.7 million in 2014 and $20.8 million in 2012. Capital expenditures were approximately $13.3 million, $21.0 million and $16.4 million in 2014, 2013 and 2012, respectively.

Net cash (used for) provided by financing activities was ($6.7) million in 2014, ($21.7) million in 2013 and $3.8 million in 2012. During 2014, the Company’s repayments on short-term bank borrowings were $15.0 million and dividend payments were $9.7 million.

The changes in foreign currency translation against the U.S. dollar increased cash by $344,000 and $389,000 in 2014 and 2013, respectively, and decreased cash by $77,000 in 2012.

The ratio of current assets to current liabilities was 3.1 to 1 at December 31, 2014 and 2013.

Management believes that cash on hand, combined with cash provided by operating activities and existing financing capabilities, will be sufficient to meet cash requirements for the next twelve months, including capital expenditures, the expected payment of quarterly dividends and principal and interest on debt outstanding.

Contractual Obligations

Capital commitments in the table below include commitments to purchase property, plant and equipment that have been approved by the Board of Directors and are enforceable and legally binding on the Company. The capital commitments do not represent the entire anticipated purchases in the future, but represent only those substantive items for which the Company is contractually obligated as of December 31, 2014. Also, the Company has some operating leases for certain offices, manufacturing facilities, land, office equipment and automobiles. Rental expenses relating to these leases were $1.1 million in 2014, 2013 and 2012.

 

 

34


The Gorman-Rupp Company         Annual Report 2014

 

The following table summarizes the Company’s contractual obligations at December 31, 2014:

 

     Payment Due By Period  
(Thousands of dollars)    Total      Less
than
1 Year
     1-3
Years
     3-5
Years
     More
than
5 Years
 

Capital commitments

   $ 3,585       $ 3,585       $ —         $ —         $ —     

Operating leases

     2,088         871         980         226         11   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 5,673       $ 4,456       $ 980       $ 226       $ 11   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Critical Accounting Policies

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States. When more than one accounting principle, or the method of its application, is generally accepted, management selects the principle or method that is appropriate in the Company’s specific circumstances. Application of these accounting principles requires management to make estimates about the future resolution of existing uncertainties; as a result, actual results could differ from these estimates.

In preparing these consolidated financial statements, management has made its best estimates and judgments of the amounts and disclosures included in the consolidated financial statements, giving due regard to materiality. The Company does not believe there is a great likelihood that materially different amounts would be reported under different conditions or using different assumptions pertaining to the accounting policies described below.

Revenue Recognition

Substantially all of the Company’s revenues from product sales are recognized when all of the following criteria are met: persuasive evidence of a sale arrangement exists, the price is fixed or determinable, product delivery has occurred or services have been rendered, there are no further obligations to customers and collectability is probable. Product delivery occurs when the risks and rewards of ownership and title pass, which usually occurs upon shipment to the customer.

Allowance for Doubtful Accounts

The Company evaluates the collectability of its accounts receivable based on a combination of factors. In circumstances where the Company is aware of a specific customer’s inability to meet its financial obligations to the Company (e.g., bankruptcy filings, substantial downgrading of credit scores), the Company records a specific allowance for bad debts against amounts due to reduce the net recognized receivable to the amount the Company reasonably believes will be collected. For all other customers, the Company recognizes allowances for bad debts based on the length of time the receivables are past due. If circumstances change (e.g., an unexpected material adverse change in a large customer’s ability to meet its financial obligations), the Company’s estimates of the recoverability of amounts due could be reduced by a material amount. Historically, the Company’s collection history has been good.

Inventories and Related Allowance

Inventories are valued at the lower of cost or market value and have been reduced by an allowance for excess and obsolete inventories. The estimated allowance is based on a variety of factors, including historical inventory usage and management evaluations. Historically, the Company has not experienced substantive write-offs due to obsolescence. The Company uses the last-in, first-out (LIFO) method for the majority of its inventories.

Product Warranties

A liability is established for estimated future warranty and service claims based on historical claims experience and specific product failures.

Pension Plans and Other Postretirement Benefit Plans

The Company recognizes the obligations associated with its defined benefit pension plan and defined benefit health care plan in its consolidated financial statements. The measurement of liabilities related to

 

 

35


The Gorman-Rupp Company         Annual Report 2014

 

Management’s Discussion and Analysis

 

pension plans and other postretirement benefit plans is based on management’s assumptions related to future events including interest rates, return on pension plan assets, rate of compensation increases and health care cost trend rates. Actual pension plan asset performance will either reduce or increase pension losses included in accumulated other comprehensive loss, which ultimately affects net income. The discount rates used to determine the present value of future benefits are based on estimated yields of investment grade fixed income investments.

The discount rate used to value pension plan obligations was 3.45% and 4.30% at December 31, 2014 and 2013, respectively. The discount rate used to value postretirement obligations was 3.60% and 4.50% at December 31, 2014 and 2013, respectively. The discount rates were determined by constructing a zero-coupon spot yield curve derived from a universe of high-quality bonds as of the measurement date. The expected rates of return on pension assets is designed to be a long-term assumption that will be subject to year-to-year variability. The assumed rate of return for 2014 and 2013 was 7.00% . Actual pension plan asset performance will either reduce or increase unamortized losses included in accumulated other comprehensive loss, which will ultimately affect net income. The assumed rate of compensation increase was 3.50% in 2014 and 2013.

The assumption used for the rate of increase in medical costs over the next five years was unchanged in 2014 from 2013. A one percentage point increase in the assumed health care trend would increase postretirement expense by approximately $201,000, changing the benefit obligation by approximately $2.2 million; while a one percentage point decrease in the assumed health care trend would decrease postretirement expense by approximately $185,000, changing the benefit obligation by approximately $1.9 million.

Substantially all retirees elect to take lump sum settlements of their benefits. When interest rates are low as they have been the last three years, this subjects

the Company to the risk of exceeding an actuarial threshold computed on an annual basis and triggering a GAAP-required non-cash pension settlement loss. This event occurred in 2013 and 2012.

Income Taxes

The basic principles related to accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns.

Realization of the Company’s deferred tax assets is principally dependent upon the Company’s achievement of projected future taxable income, which management believes will be sufficient to fully utilize the deferred tax assets recorded, with the exception of deferred tax associated with certain state tax credits for which a valuation allowance has been recognized.

Goodwill and Other Intangibles

The Company accounts for goodwill in a purchase business combination as the excess of the cost over the fair value of net assets acquired. Business combinations can also result in other intangible assets being recognized. Amortization of intangible assets, if applicable, occurs over their estimated useful lives.

Goodwill and indefinite lived intangible assets are tested annually for impairment as of October 1, or whenever events or changes in circumstances indicate there may be a possible permanent loss of value in accordance with ASC 350, Intangibles  Goodwill and Other .

Goodwill is tested for impairment at the reporting unit level and is based on the net assets for each reporting unit, including goodwill and intangible assets. The Company has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not

 

 

36


The Gorman-Rupp Company         Annual Report 2014

 

that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary.

In assessing the qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we identify and assess relevant drivers of fair value and events and circumstances that may impact the fair value and the carrying amount of the reporting unit. The identification of relevant events and circumstances and how these may impact a reporting units’ fair value or carrying amount involve significant judgments and assumptions. The judgments and assumptions include the identification of macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, Company-specific events and share price trends and making the assessment on whether each relevant factor will impact the impairment test positively or negatively and the magnitude of any such impact.

When performing a quantitative assessment of goodwill impairment if necessary or in years where we elect to do so, a discounted cash flow model is used to estimate the fair value of each reporting unit, which considers forecasted cash flows discounted at an estimated weighted-average cost of capital. The forecasted cash flows are based on the Company’s long-term operating plan and the weighted-average cost of capital is an estimate of the overall after-tax rate of return. Other valuation techniques including comparative market multiples are used when appropriate. Discount rate assumptions are based on an assessment of the risk inherent in the future cash flows of the respective reporting units.

Based upon our fiscal 2014 and 2013 quantitative and qualitative impairment analyses, the Company concluded that it is more likely than not that the fair value of our reporting units continues to substantially exceed the respective carrying amounts.

Indefinite life intangible assets primarily consist of trademarks and trade names. The fair value of these

assets is determined using a royalty relief methodology similar to that employed when the associated assets were acquired, but using updated estimates of future sales, cash flows and profitability. For 2014 and 2013, the fair value of indefinite lived intangible assets exceeded the respective carrying value.

Other intangible assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount may not be recovered through future net cash flows generated by the assets.

Other Matters

Certain transactions with related parties are in the ordinary course of business and are not material to the Company’s consolidated financial position, net income or cash flows.

The Company does not have any off-balance sheet arrangements, financings or other relationships with unconsolidated “special purpose entities.” The Company is not a party to any long-term debt agreements, or any material capital leases or purchase obligations.

 

 

37


The Gorman-Rupp Company         Annual Report 2014

 

Report of Management on Internal Control

Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company (as defined in Exchange Act rules 13[a]–15[f ]). Internal control over financial reporting is a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers, or persons performing similar functions, and affected by the Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States.

The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States, and that receipts and expenditures of the Company are being made only in accordance with authorizations of Management and Directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework). Based on this evaluation, Management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2014.

The independent registered public accounting firm of Ernst & Young LLP that has audited the consolidated financial statements included in this annual report on Form 10-K, has also issued an attestation report on the Company’s internal control over financial reporting as of December 31, 2014. This report is included on the following page.

 

/s/ JEFFREY S. GORMAN

Jeffrey S. Gorman

President and Chief Executive Officer

 

/s/ WAYNE L. KNABEL

Wayne L. Knabel

Chief Financial Officer

March 9, 2015

 

38


The Gorman-Rupp Company         Annual Report 2014

 

Report of Independent Registered

Public Accounting Firm

The Board of Directors and Shareholders

of The Gorman-Rupp Company

We have audited The Gorman-Rupp Company’s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) (the COSO criteria). The Gorman-Rupp Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Report of Management on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, The Gorman-Rupp Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of The Gorman-Rupp Company as of December 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income, equity and cash flows for each of the three years in the period ended December 31, 2014 of The Gorman-Rupp Company and our report dated March 9, 2015 expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG LLP

Cleveland, Ohio

March 9, 2015

 

39


The Gorman-Rupp Company         Annual Report 2014

 

Eleven-Year Summary of Selected Financial Data

(Thousands of dollars, except per share amounts)

 

     2014      2013      2012      2011  

Operating Results

           

Net sales

   $ 434,925       $ 391,665       $ 375,691       $ 359,490   

Gross profit

     107,559         93,655         90,151         87,837   

Income taxes

     17,593         14,173         14,244         13,881   

Net income

     36,141         30,104         28,203         28,804   

Depreciation and amortization

     14,615         13,588         12,066         11,459   

Interest expense

     134         146         122         179   

Return on net sales (%)

     8.3         7.7         7.5         8.0   

Sales dollars per employee

     340.6         315.6         326.4         327.1   

Income dollars per employee

     28.3         24.3         24.5         26.2   

Financial Position

           

Current assets

   $ 200,709       $ 189,289       $ 175,675       $ 155,872   

Current liabilities

     64,346         60,760         64,821         50,873   

Working capital

     136,363         128,529         110,854         104,999   

Current ratio

     3.1         3.1         2.7         3.1   

Property, plant and equipment—net

   $ 133,964       $ 131,189       $ 123,066       $ 114,349   

Capital additions—net

     13,275         21,015         16,373         11,175   

Total assets

     380,904         355,638         335,183         298,700   

Equity

     281,967         264,140         234,719         214,764   

Dividends paid

     9,715         8,662         8,188         7,430   

Average number of employees

     1,277         1,241         1,151         1,099   

Shareholder Information

           

Earnings per share

   $ 1.38       $ 1.15       $ 1.07       $ 1.10   

Cash dividends per share

     0.370         0.330         0.312         0.283   

Equity per share at December 31

     10.74         10.06         8.94         8.19   

Average number of shares outstanding

     26,256,824         26,249,324         26,242,366         26,234,579   

Summary of Quarterly Results of Operations

(Thousands of dollars, except per share amounts)

The following is a summary of unaudited quarterly results of operations for the years ended December 31, 2014 and 2013:

 

Quarter Ended 2014    Net Sales      Gross Profit      Net Income      Earnings
per Share
 

First quarter

   $ 110,064       $ 27,554       $ 9,954       $ 0.38   

Second quarter

     109,728         26,904         8,860         0.34   

Third quarter

     110,159         28,066         9,439         0.36   

Fourth quarter

     104,974         25,035         7,888         0.30   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 434,925       $ 107,559       $ 36,141       $ 1.38   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

40


The Gorman-Rupp Company         Annual Report 2014

 

 

 

 

 

2010     2009     2008     2007     2006     2005     2004  
$ 296,808      $ 266,242      $ 330,646      $ 305,562      $ 270,910      $ 231,249      $ 203,554   
  76,337        61,773        77,089        67,452        58,676        47,071        42,425   
  12,370        8,986        13,297        12,524        8,654        6,235        5,075   
  25,963        18,269        27,197        22,859        19,072        10,903        9,277   
  10,601        8,955        7,848        7,597        6,688        6,808        7,179   
  175        170        45        49        41        25        40   
  8.7        6.9        8.2        7.5        7.0        4.7        4.6   
  304.4        264.1        302.5        286.9        258.3        233.3        211.4   
  26.6        18.1        24.9        21.5        18.2        11.0        9.6   
           
$ 143,194      $ 131,400      $ 134,266      $ 135,288      $ 120,118      $ 110,501      $ 96,974   
  59,678        43,175        35,569        33,481        27,646        28,219        21,112   
  83,516        88,225        98,697        101,807        92,472        82,282        75,862   
  2.4        3.0        3.8        4.0        4.3        3.9        4.6   
$ 113,526      $ 108,523      $ 80,406      $ 59,970      $ 52,351      $ 51,505      $ 54,812   
  8,310        38,071        27,909        12,826        7,258        3,189        7,500   
  286,707        249,424        231,538        211,534        187,540        179,541        165,673   
  199,834        177,612        159,206        149,960        128,142        127,048        121,898   
  7,024        6,767        6,682        6,503        6,126        5,983        5,907   
  975        1,008        1,093        1,065        1,049        991        963   
           
$ 0.99      $ 0.70      $ 1.04      $ 0.88      $ 0.73      $ 0.42      $ 0.36   
  0.269        0.259        0.256        0.248        0.234        0.229        0.227   
  7.65        6.80        6.10        5.75        4.91        4.87        4.68   
  26,132,160        26,107,886        26,101,891        26,095,586        26,089,004        26,081,676        26,073,433   

 

 

 

 

 

 

 

Quarter Ended 2013    Net Sales      Gross Profit      Net Income      Earnings
per Share
 

First quarter

   $ 92,457       $ 21,224       $ 5,818       $ 0.22   

Second quarter

     106,415         26,481         9,168         0.35   

Third quarter

     101,186         24,485         7,946         0.30   

Fourth quarter

     91,607         21,465         7,172         0.28   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 391,665       $ 93,655       $ 30,104       $ 1.15   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

41


The Gorman-Rupp Company         Annual Report 2014

 

Shareholder Information

Comparison of 5-Year Cumulative Total Shareholder Return Among The Gorman-Rupp Company,

NYSE MKT Composite Index and SIC Code 3561

 

LOGO

ASSUMES $100 INVESTED ON JANUARY 1, 2010 AND DIVIDENDS REINVESTMENT THROUGH YEAR ENDING DECEMBER 31, 2014.

Set forth above is a line graph comparing the yearly percentage change in the cumulative total shareholder return, including reinvested cash dividends, on the Company’s common shares against the cumulative total return of the NYSE MKT Exchange Index and a Peer Group Index for the period of five fiscal years commencing January 1, 2010 and ending December 31, 2014. The issuers in the SIC Code Index were selected on a line-of-business basis by reference to SIC Code 3561 — Pumps and Pumping Equipment. The SIC Code Index is composed of the following issuers: Ampco-Pittsburgh Corp., Colfax Corp., Flowserve Corp., Graco Inc., Idex Corp., ITT Corp., The Gorman-Rupp Company and Xylem Inc.

Quarterly Stock Prices and Dividends

The high and low sales price and dividends per share for common shares traded on the NYSE MKT Exchange were:

 

     Sales Price of Common Shares      Dividends Per Share  
     2014      2013      2014      2013  
     High      Low      High      Low                

First quarter

   $ 35.16       $ 29.12       $ 24.78       $ 22.82       $ 0.09       $ 0.08   

Second quarter

     39.36         29.28         25.50         21.44         0.09         0.08   

Third quarter

     36.82         28.28         33.88         24.43         0.09         0.08   

Fourth quarter

     33.08         27.70         34.59         28.19         0.10         0.09   

There were approximately 3,497 shareholders as of January 31, 2015, of which 1,001 were registered holders of common shares.