Gorman-Rupp Company (NYSE: GRC) — Q2 2020 Form 10-Q
Business context and reporting period. The company designs and manufactures pumps and pump systems for water, wastewater, construction, industrial, petroleum, agriculture, fire protection and other markets. This unaudited report covers the quarter and six months ended June 30, 2020; comparisons are with the same 2019 periods. Management attributed weaker results primarily to COVID-19-related demand declines and softness in oil and gas.
Key financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $85.8 million | $108.3 million | $177.5 million | $205.2 million |
| Gross profit / margin | $21.8 million / 25.5% | $28.2 million / 26.0% | $45.3 million / 25.5% | $51.5 million / 25.1% |
| Operating income / margin | $9.0 million / 10.5% | $13.2 million / 12.2% | $17.6 million / 9.9% | $22.2 million / 10.8% |
| Net income | $5.6 million | $10.5 million | $11.1 million | $17.7 million |
| Diluted earnings per share as reported | $0.22 | $0.40 | $0.43 | $0.68 |
- Q2 sales declined 20.8%; first-half sales declined 13.5%. Domestic and international sales both fell. International sales were 31% of Q2 revenue.
- First-half cash from operations was $17.1 million, down from $26.5 million. Investing cash outflow was $3.5 million; financing cash outflow was $8.2 million, primarily dividends.
- Cash and equivalents rose $5.2 million in the first half to $85.8 million. The company reported no bank debt and $23.9 million available under bank lines after $7.1 million of letters of credit. Current assets were $234.2 million and current liabilities $45.8 million.
- Management-defined adjusted EBITDA was $23.7 million for the first half, versus $29.8 million in 2019. Adjusted free cash flow, defined as adjusted EBITDA less capital expenditures and dividends, was $12.6 million versus $19.3 million.
- Backlog was $110.3 million at June 30, up from $107.0 million a year earlier and $105.0 million at December 31, 2019. Remaining performance obligations were expected to be recognized substantially within one year.
Material changes and unusual items
- Q2 net income fell 46.2%; first-half net income fell 37.2%. Lower volumes reduced operating leverage, while SG&A costs declined in dollars but increased as a share of sales.
- First-half gross margin improved 40 basis points, mainly due to lower material costs and previously implemented price increases; Q2 gross margin declined 50 basis points year over year as lower volume weighed on fixed-cost absorption.
- Other expense included non-cash pension settlement charges of $1.9 million in Q2 and $3.4 million for the first half. Reported EPS included charges of $0.06 and $0.10, respectively. Management’s non-GAAP adjusted EPS was $0.28 for Q2 and $0.53 for the first half.
- First-half other expense also reflected approximately $0.5 million of foreign-exchange losses. The effective tax rate was 20.3% for both Q2 and the first half.
Outlook, risks and contingencies
- Management said near-term sales would remain challenging because of uncertainty surrounding COVID-19 and continued weakness in oil and gas. The pandemic’s ultimate financial impact could be material but could not be reasonably estimated. Most facilities remained operational and the company reported a strong supply chain, while noting some global supply restrictions.
- No specific full-year earnings or revenue guidance was provided. Planned 2020 capital expenditures were $10 million to $12 million, primarily for buildings and equipment, expected to be funded internally.
- The company expected to continue regular quarterly dividends, subject to board review and discretion. A $0.145-per-share dividend was authorized for payment in September 2020.
- Key stated risks include pandemic duration and effects, competition, raw-material availability and costs, foreign-exchange exposure, pension settlement expense, goodwill or intangible-asset impairment, and acquisition execution. The filing reported no material change in previously disclosed legal proceedings.
Important facts for investors to verify
- Whether customer demand, incoming orders and backlog stabilize or deteriorate as pandemic effects and oil-and-gas weakness continue.
- Whether reduced production volumes continue to pressure operating margins and cash from operations.
- The recurring cash and earnings impact of pension settlements, pension assumptions and foreign-exchange movements; distinguish reported results from management’s non-GAAP adjustments.
- Availability of credit lines, covenant compliance, planned capital spending and the board’s future dividend decisions.