Business context and reporting period
The Gorman-Rupp Company designs, manufactures and sells pumps and pump systems across water and wastewater, construction, industrial, petroleum, agricultural, fire-protection and other markets. It operates as one business segment. This Form 10-K covers the fiscal year ended December 31, 2020; the fourth-quarter figures are also summarized below.
Financial performance
Amounts are in millions of dollars except per-share data, percentages and ratios.
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Net sales | $349.0 | $398.2 | (12.4%) |
| Gross profit / margin | $89.6 / 25.7% | $102.7 / 25.8% | — |
| Operating income / margin | $35.8 / 10.2% | $43.8 / 11.0% | Income down 18.4% |
| Income before taxes | $31.2 | $45.2 | (30.8%) |
| Net income | $25.2 | $35.8 | (29.7%) |
| Diluted earnings per share | $0.97 | $1.37 | (29.2%) |
| Cash from operating activities | $51.2 | $62.2 | Down $11.0 |
| Capital expenditures | $8.0 | $10.9 | Down $2.9 |
| Cash dividends paid | $15.4 | $14.4 | Up $1.0 |
At year-end, cash and cash equivalents were $108.2 million, up from $80.6 million; the Company reported no bank debt. Current assets were $246.8 million and current liabilities $38.5 million, giving working capital of $208.3 million and a 6.4 current ratio. Available borrowing capacity was reported as $24.5 million after letters of credit. Total assets were $394.5 million and equity was $315.5 million.
Backlog was $113.1 million, up 7.7% from $105.0 million a year earlier; approximately 91% was scheduled for shipment in 2021. Fourth-quarter 2020 sales were $82.5 million versus $93.7 million in the prior-year quarter; net income was $6.8 million versus $8.3 million, and EPS was $0.26 versus $0.32.
Material changes versus the prior period
- Sales declined across most markets, primarily reflecting COVID-19 effects and weaker oil and gas activity. Domestic sales fell 10.3%; international sales fell 17.0% to $102.1 million and represented 29% of sales, versus 31% in 2019.
- Water-market sales decreased 9.4%; non-water-market sales decreased 18.9%. Agriculture sales increased $1.5 million, but construction, repair, municipal and fire-protection sales declined. OEM, industrial and petroleum sales also fell.
- Gross margin edged down 10 basis points. Lower material costs partly offset unfavorable LIFO effects and lower fixed-cost absorption from reduced volume. Operating margin fell 80 basis points; SG&A declined in dollars but increased as a share of sales.
- Other expense was $4.5 million, compared with $1.3 million of other income in 2019, principally due to a $4.6 million non-cash pension settlement charge. Management’s non-GAAP adjusted EPS was $1.11 versus $1.37; adjusted EBITDA was $48.5 million versus $58.9 million.
- Operating cash flow declined, but cash rose by $27.6 million, supported in part by lower receivables. Inventory increased to $82.7 million from $76.0 million as the Company prepared for customer demand.
Outlook, risks and other notable items
Management said first-half 2021 sales would remain challenging amid the pandemic, while describing the Company as financially strong and its longer-term outlook as positive. It planned 2021 capital expenditures of $15–$20 million, funded internally, and pension contributions of up to $2.0 million. Management expected a 2021 effective tax rate of 21%–23%. The Board declared a quarterly dividend of $0.155 per share in January 2021; future dividends remain at the Board’s discretion.
Key risks include the duration and effects of COVID-19, cyclical customer investment and oil-and-gas exposure, competitive and pricing pressure, input costs and supply availability, foreign currency and international-market risks, cybersecurity, regulatory and environmental obligations, and acquisition execution. The National Pump reporting unit’s goodwill fair value exceeded carrying value by approximately 31% in the annual test; the filing notes that weaker growth or lower projections could lead to future impairment. No goodwill impairment was recorded in 2020.
The filing reports asbestos-related lawsuits and other ordinary-course legal proceedings, which management did not expect to materially affect results, liquidity or financial condition. It also identifies the pension settlement charge as a material non-cash item. The independent auditor gave an unqualified opinion on the financial statements and internal control; National Pump goodwill impairment testing was identified as a critical audit matter.
Most important facts for investors to verify
- Whether the $113.1 million backlog converts to shipments and revenue as scheduled, especially given the expected first-half 2021 challenges.
- Whether order trends, including the 16.0% sequential fourth-quarter increase, persist; full-year incoming orders were down 8.7% year over year.
- How sales recovery and volume affect gross and operating margins, and whether LIFO and material-cost impacts change.
- Whether cash generation supports planned capital expenditures, dividends and pension contributions without borrowing.
- The assumptions and headroom underlying National Pump goodwill valuation, and the effect of pandemic-related uncertainty on future estimates.
- Potential pension settlement charges, benefit obligations and sensitivity to discount rates and asset returns.