The Gorman-Rupp Company — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. Gorman-Rupp designs, manufactures, and markets pumps and pump systems for water, wastewater, construction, industrial, agricultural, petroleum, fire protection, and other markets. Financial statements are unaudited; amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Net sales | $103.9 million | $109.7 million | $203.1 million | $219.8 million |
| Gross profit / margin | $24.1 million / 23.2% | $26.9 million / 24.5% | $48.1 million / 23.7% | $54.5 million / 24.8% |
| Operating income / margin | $9.9 million / 9.5% | $13.4 million / 12.2% | $20.5 million / 10.1% | $28.1 million / 12.8% |
| Net income | $6.6 million | $8.9 million | $13.9 million | $18.8 million |
| Earnings per share | $0.25 | $0.34 | $0.53 | $0.72 |
Q2 sales declined 5.3% and first-half sales declined 7.6%. Net income fell 25.2% in Q2 and 26.1% for the first half. Lower sales volume and a non-cash pension settlement charge weighed on gross and operating margins. Dividends per share were $0.10 for Q2 and $0.20 for the first half, compared with $0.09 and $0.18, respectively, in 2014.
Cash flow, balance sheet, and liquidity
- First-half operating cash flow was $17.5 million, versus $12.0 million in 2014. Investing activities used $4.1 million, compared with $21.9 million, which included the Bayou City Pump acquisition in 2014. Financing activities used $11.3 million, including $5.3 million of dividends and $6.0 million of debt repayment.
- At June 30, cash and cash equivalents were $26.0 million; short-term debt was $6.0 million. Management separately reported cash and cash equivalents and short-term investments of $26.2 million, and $24.4 million of availability under bank lines after letters of credit.
- Current assets were $205.6 million and current liabilities were $56.7 million; the current ratio was 3.6-to-1. Working capital was a record $148.9 million. Total liabilities were $92.3 million and shareholders’ equity was $289.8 million.
- Capital expenditures for full-year 2015 were estimated at $11–$13 million, expected to be funded principally by internally generated cash. The company reported compliance with its restrictive covenants.
Material changes and business drivers
- Q2 water-market sales were approximately flat overall. Higher fire-protection sales were offset by declines in construction and rental, municipal, and agricultural markets. Non-water sales fell, principally due to lower OEM sales. First-half declines were concentrated in construction/rental, municipal, agricultural, and OEM markets.
- Domestic sales fell 10.8% in Q2 and 10.0% for the first half. International sales rose 7.9% in Q2 but declined 2.4% for the first half. Unfavorable currency translation accounted for $2.1 million of the Q2 sales decline and $4.3 million of the first-half decline.
- Backlog was $144.2 million at June 30, versus $173.8 million a year earlier and $160.7 million at year-end 2014. Approximately $27.4 million related to the New Orleans Permanent Canal Closures and Pumps (PCCP) project remained in backlog; $18.7 million was scheduled to ship in the second half of 2015 and $8.7 million of installation services in the first three quarters of 2016.
- Bayou City Pump, acquired in June 2014, contributed to the 2015 comparison; 2015 was expected to be its first full fiscal year in the company.
Outlook, risks, and unusual items
- Management said low oil and natural-gas prices and reduced production were adversely affecting construction, rental, and industrial pump markets, with indirect effects on other markets. A strong U.S. dollar hurt export sales; lower commodity prices and unusually wet weather weighed on agricultural sales.
- Management expected gradual improvement in fire and municipal pump sales and said the PCCP project was expected to remain on schedule through 2015 and 2016. It cited long-term growth opportunities in water and wastewater infrastructure, international markets, and industrial and agricultural applications, while noting that headwinds could persist for several quarters.
- A $1.5 million non-cash pension settlement charge was recorded in Q2, reducing after-tax earnings by approximately $966,000, or $0.04 per share. Management expected another non-cash settlement charge during the remainder of 2015 as retirements occurred.
- Key forward-looking risks include economic and spending conditions, competition, new-product success, emerging-market conditions, timing or disruption of the PCCP project, and the ability to complete and integrate acquisitions. The company reported no material changes to previously disclosed legal proceedings or risk factors.
- The board declared a $0.10-per-share quarterly dividend on July 23, 2015. Future dividends remain subject to board discretion and business and financial conditions.
Important facts for investors to verify
- Whether sales, margins, and backlog stabilize, particularly in construction/rental, OEM, municipal, and agricultural markets.
- The timing and remaining value of PCCP shipments and installation work, and whether the project stays on schedule.
- The size and timing of further pension settlement charges and their effect on earnings.
- Cash generation, capital spending, debt and credit-line availability, and the capacity to sustain dividends.
- Whether currency movements, oil and gas conditions, and agricultural weather and commodity conditions continue to affect demand.