Gorman-Rupp Company — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; compared with Q1 2019. Gorman-Rupp designs and manufactures pumps and pump systems for water, wastewater, construction, industrial, petroleum, agricultural, fire-protection, and other markets. Amounts below are in U.S. dollars; financial-statement figures are converted from thousands to millions where indicated.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Net sales | $91.7 million | $96.9 million; down 5.4% |
| Gross profit / margin | $23.4 million / 25.6% | $23.3 million / 24.1% |
| Operating income / margin | $8.6 million / 9.4% | $9.0 million / 9.2% |
| Net income / diluted earnings per share | $5.5 million / $0.21 | $7.2 million / $0.28 |
| Operating cash flow | $8.4 million | $9.7 million |
| Capital expenditures | $1.7 million | $2.1 million |
| Cash and cash equivalents | $82.4 million at March 31 | $80.6 million at December 31, 2019 |
- Gross margin expanded 150 basis points, principally from lower material costs and the full effect of 2019 price increases; lower-volume fixed-cost leverage partly offset the benefit. SG&A rose 3.5% to $14.9 million and increased to 16.2% of sales from 14.8%.
- Other expense was $1.7 million, versus $0.3 million of other income a year earlier. It included a $1.5 million non-cash pension settlement loss and $0.5 million of foreign-exchange losses. The company said the settlement charge reduced net income by $1.1 million after tax and EPS by $0.04; adjusted EPS excluding the charge was $0.25.
- Cash from operations declined primarily because of increased inventory. Cash rose $1.9 million during the quarter. Company-defined non-GAAP free cash flow was $6.1 million, down from $7.2 million; its calculation starts with adjusted EBITDA and subtracts capital expenditures and dividends.
- No bank debt was outstanding. The company reported $23.7 million available under bank lines after $7.3 million of letters of credit. It reported compliance with debt covenants. Current assets were $229.5 million and current liabilities were $44.9 million at quarter-end.
- The quarterly dividend was $0.145 per share, up from $0.135 a year earlier. The board authorized another $0.145 dividend for payment in June 2020.
Material changes and operating trends
- Domestic sales fell 3.4% and international sales fell 9.8%; international sales were 29% of total sales versus 30% in Q1 2019. Pump and pump-system sales declined to $78.3 million from $82.5 million; repair-parts and other sales declined to $13.4 million from $14.3 million.
- Construction sales fell $6.1 million, largely due to softness in oil and gas drilling. Fire-protection sales rose $2.2 million and agriculture sales rose $0.8 million. Petroleum and OEM sales also declined.
- Backlog was $113.8 million at March 31, up from $105.0 million at December 31, 2019, but below $120.8 million a year earlier. First-quarter incoming orders declined 3.3% year over year and increased 3.5% from Q4 2019.
- The effective tax rate was 20.4%, compared with 21.9%, primarily reflecting favorable discrete items. Comprehensive income was $4.7 million, including a $2.4 million currency-translation loss.
Outlook, risks, and other notable items
- Management said COVID-19 did not materially adversely affect reported first-quarter results, but its impact on the full year and beyond was uncertain and could be material. Sales were expected to remain challenging in the near term because of COVID-19 uncertainty and continued oil-and-gas market softness. All manufacturing facilities were operating at the time of the filing; the company reported one temporary facility closure in South Africa.
- Planned 2020 capital expenditures were $10 million to $15 million, mainly for building improvements and machinery and equipment, expected to be funded internally. The filing did not provide specific full-year revenue or earnings guidance.
- Management cited a strong balance sheet and liquidity as support for operations, acquisition opportunities, and product development. It said an infrastructure bill supporting water, wastewater, and flood-control investment would be beneficial. Future dividends remain subject to board review and declaration.
- Key risks include pandemic-related facility and supply-chain disruptions, weaker customer demand, raw-material cost or availability, competition, foreign-exchange movements, pension settlement expense, and potential goodwill impairment. The filing said the pandemic’s financial impact could not be reasonably estimated. No material changes to previously reported legal proceedings were disclosed.
- The company adopted the expected-credit-loss accounting standard effective January 1, 2020, with no material financial-statement impact. Management concluded disclosure controls were effective as of March 31, 2020.
Important facts for investors to verify
- Whether COVID-19, customer demand, and supply-chain conditions affected subsequent-quarter sales, margins, cash flow, or facility operations.
- Whether backlog converted to revenue as expected and whether incoming orders and oil-and-gas exposure improved or weakened.
- Whether planned capital spending, dividend payments, and liquidity remain consistent with management’s expectations and the company’s no-bank-debt position.
- The distinction between GAAP results and management’s non-GAAP adjusted EPS, adjusted EBITDA, and free-cash-flow measures, including the pension-settlement adjustment.