The Gorman-Rupp Company — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; financial statements are unaudited. Gorman-Rupp designs and manufactures pumps and pump systems for water, industrial, construction, petroleum, fire protection, and other markets.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $96.6 million | $92.6 million | +4.3% |
| Gross profit / margin | $26.2 million / 27.1% | $22.3 million / 24.0% | Margin +310 bps |
| Operating income / margin | $11.9 million / 12.3% | $8.7 million / 9.3% | Income +36.9% |
| Net income | $9.6 million | $5.1 million | +89.9% |
| Diluted earnings per share | $0.37 | $0.19 | +$0.18 |
| Operating cash flow | $14.5 million | $7.6 million | +$6.9 million |
Gross-margin improvement was attributed primarily to favorable sales mix; SG&A rose 5.6% to $14.4 million, or 14.9% of sales, mainly due to personnel costs. The effective tax rate declined to 24.0% from 30.8%, primarily reflecting the Tax Act. Reported results included non-cash pension settlement charges: $0.3 million after tax in 2018 versus $1.1 million in 2017. Management’s non-GAAP adjusted EPS was $0.38 versus $0.23, and adjusted EBITDA was $16.6 million versus $12.8 million.
Cash, liquidity, and balance sheet
- Cash increased $8.7 million during the quarter to $88.4 million. The company reported no bank debt at March 31, 2018.
- It had $22.4 million available under bank lines after $8.6 million of letters of credit. The company reported compliance with debt covenants.
- Capital expenditures were $2.0 million; cash dividends were $3.3 million. Management-defined non-GAAP free cash flow, after capital expenditures and dividends, was $11.3 million, compared with $7.8 million.
- Current assets were $238.4 million and current liabilities $49.3 million. Inventories were $79.1 million, up from $75.0 million at year-end 2017.
Material changes and business trends
- Domestic sales increased 8.9% while international sales declined 3.8%; international sales were 33% of total sales, versus 36% a year earlier.
- Construction, industrial, and petroleum sales benefited from activity associated with oil and gas drilling. Municipal sales declined on lower flood-control-project shipments, and fire-protection sales weakened, particularly in the Middle East.
- Backlog rose 31% year over year to $127.3 million, from $96.9 million, and was up from $114.0 million at December 31, 2017. Management cited stronger incoming orders across most markets, especially municipal, industrial, and fire protection.
- Adoption of the new revenue standard had an immaterial cumulative effect on opening retained earnings. The new pension-cost presentation reduced Q1 2018 operating income by $59,000 and increased Q1 2017 operating income by $1.7 million on a retrospective basis; the 2017 pension settlement charge was reclassified outside operating income.
Outlook, risks, and contingencies
Management described the year’s start as strong and said it expected full-year 2018 effective tax rate of 23%–26%. Planned 2018 capital additions were $10–$15 million, primarily for building expansion and machinery and equipment, expected to be funded with internally generated cash and existing credit lines. Management cited infrastructure spending and lower taxes as potential positives, while noting agriculture remained soft and the company was monitoring potential tariff effects on material costs and international sales. It intended to continue evaluating acquisitions and product-development opportunities. Future dividends remain subject to board discretion.
Risks identified include competition, raw-material availability, foreign-exchange movements and international market conditions, tariffs and trade-law compliance, taxes, pension-settlement costs, acquisitions, cybersecurity, environmental obligations, and goodwill impairment. Foreign-currency transaction gains were $0.4 million in Q1 2018 versus $0.2 million in Q1 2017. Management reported no material changes to previously disclosed legal proceedings or risk factors; it also said disclosure controls were effective at quarter-end.
Important facts for investors to verify
- Whether higher backlog converts to sales as expected, and whether recent order strength persists across markets.
- Whether favorable sales mix and margin improvement continue, especially amid tariff, input-cost, and personnel-cost pressures.
- How the Tax Act’s remaining provisional estimates and GILTI accounting-policy decision affect later-period taxes; management said adjustments could be made by Q4 2018.
- Whether planned $10–$15 million capital spending and dividend policy remain consistent with cash generation and liquidity.
- How much of the $127.3 million backlog is recognized within one year; the filing says substantially all remaining performance obligations are expected to be recognized in that period.