The Gorman-Rupp Company — Q2 2014 Form 10-Q
Business context and period: The company manufactures pumps and pumping systems. This unaudited report covers the three and six months ended June 30, 2014, compared with the corresponding 2013 periods. Dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $109.7 | $106.4 | $219.8 | $198.9 |
| Gross profit / margin | $26.9 / 24.5% | $26.5 / 24.9% | $54.5 / 24.8% | $47.7 / 24.0% |
| Operating income / margin | $13.4 / 12.2% | $13.5 / 12.7% | $28.1 / 12.8% | $21.8 / 10.9% |
| Net income | $8.9 | $9.2 | $18.8 | $15.0 |
| Earnings per share | $0.34 | $0.35 | $0.72 | $0.57 |
- Q2: Sales increased 3.1%; net income declined 3.4%. Domestic sales rose 11.9%, while international sales fell 13.5%. Municipal wastewater and flood-control sales supported water-market growth; lower fire-protection shipments and wet-weather-related agriculture weakness partly offset it.
- First half: Sales grew 10.5%, and net income rose 25.5%. Domestic sales increased 16.0%; international sales were comparable to 2013. Growth came from municipal, construction, and OEM markets.
- First-half 2014 gross profit, operating income, and net income were records. Comparisons benefit from a 2013 non-cash pension settlement charge: it reduced 2013 first-half EPS by $0.07 and affected Q2 2013 EPS by $0.04. Q2 2014 margin pressure reflected higher material and freight costs, temporary labor, and labor headcount; the company cited PCCP project component purchases and specialized shipments.
Cash, liquidity, and capital
- First-half operating cash flow was $12.0, down from $21.1 in 2013; the company attributed the main cash use to higher receivables associated with record sales.
- Investing cash flow was negative $21.9, including $16.3 for the Bayou City Pump acquisition and $5.6 of capital additions. Financing cash flow was positive $8.9, including $18.0 of bank borrowing, partly offset by debt repayments and dividends. Cash fell $1.7 to $29.4.
- At June 30, cash and short-term investments were $29.7, short-term bank debt was $22.7, and unused bank lines were $26.1 after letters of credit. The company reported compliance with its borrowing covenants. Working capital was $129.2; the current ratio was 2.7, versus 3.1 at year-end 2013.
- Assets totaled $385.6 and shareholders’ equity $278.3. Short-term debt rose from $9.0 at December 31, 2013, principally reflecting acquisition financing.
- First-half dividends were $4.7. The board declared a quarterly dividend of $0.09 per share, payable September 10, 2014. Estimated 2014 net capital expenditures are $12–$14, expected to be funded principally from internally generated cash.
Material developments, outlook, and risks
- In June, the company’s National Pump subsidiary acquired substantially all assets and certain liabilities of Bayou City Pump, a pump manufacturer and service provider. The all-cash purchase was financed with an $18.0 short-term unsecured bank loan. Bayou City reported approximately $16 in 2013 revenue; the acquisition was not material to consolidated results, so pro forma results were not provided.
- Backlog was $173.8 at June 30, down from $182.2 at year-end, principally due to record first-half shipments. Incoming orders grew 12.6% in Q2 versus Q1. About $53.5 of the New Orleans flood-control PCCP project remained in backlog, with shipments expected mainly in the second half of 2014 and first half of 2015.
- No specific earnings or sales guidance was provided. Management expects long-term growth from water and wastewater infrastructure needs, industrial and agricultural demand, new products, and expanded domestic and international customers, and believes the company can grow organically at generally comparable operating margins.
- Forward-looking risks include economic and spending conditions, competition, successful product launches and expansion into emerging markets, tax and regulatory changes, possible delays or disruptions to the New Orleans flood-control project, and acquisition availability and integration. Wet weather affected agriculture sales; Q2 international sales declined.
- The company said there were no material changes to previously reported legal proceedings or risk factors. Disclosure controls were assessed as effective at June 30, 2014. Adoption of the new revenue-recognition standard (ASU 2014-09), effective for the company after December 15, 2016, was being assessed; management did not expect a material impact.
Important facts for investors to verify
- Whether Q2 material, freight, labor, and PCCP project costs continue to pressure margins as project shipments proceed.
- Whether the strong first-half sales and order growth convert into shipments and rebuild backlog, including the timing and execution of the remaining $53.5 PCCP work.
- Receivables collection and operating cash flow, given the sharp first-half cash-flow decline and record-sales-related receivables growth.
- Bayou City Pump’s integration, contribution, and repayment of acquisition-related bank borrowing, alongside planned capital spending.
- The effect of the lapsed federal research and development tax credit on the effective tax rate; management cited it as a reason for the higher 2014 rate.