The Gorman-Rupp Company — Q1 2019 Form 10-Q
Business and period: The company designs, manufactures and markets pumps and pump systems for water, wastewater, construction, industrial and other liquid-handling markets. This unaudited report covers the three months ended March 31, 2019; comparisons are with Q1 2018 unless noted. Dollar amounts below are in millions except per-share data.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $96.9 | $96.6 | +0.3% |
| Gross profit / margin | $23.3 / 24.1% | $26.2 / 27.1% | Margin down 3.0 points |
| Operating income / margin | $9.0 / 9.2% | $11.9 / 12.3% | Income down 24.5% |
| Net income | $7.2 | $9.6 | Down 24.9% |
| Diluted earnings per share | $0.28 | $0.37 | Down $0.09 |
| Operating cash flow | $9.7 | $14.5 | Down $4.9 |
| Capital expenditures | $2.1 | $2.0 | — |
Cost of products sold rose 4.5% to $73.5 million while SG&A was essentially unchanged at $14.4 million. The effective tax rate was 21.9%, versus 24.0%. Management reported adjusted EBITDA of $12.8 million and non-GAAP free cash flow of $7.2 million for Q1 2019; its free-cash-flow measure deducts capital expenditures and dividends from adjusted EBITDA.
Liquidity and balance sheet
- Cash was $50.2 million at March 31, up $3.7 million from year-end; total current assets were $208.0 million and current liabilities $45.5 million.
- The company reported no outstanding bank debt and $23.5 million available under bank lines after $7.5 million of letters of credit. It stated that it was in compliance with debt covenants.
- Operating cash flow was lower year over year, which management attributed mainly to lower gross margin and decreases in income taxes payable and commissions payable; lower inventories partly offset these effects.
- Cash dividends paid were $3.5 million. The company’s quarterly dividend increased to $0.135 per share from $0.125 a year earlier.
- Lease liabilities totaled $1.7 million after adoption of the new lease standard; adoption added $1.6 million of operating lease right-of-use assets and liabilities at January 1, 2019.
Material changes and operating trends
- Domestic sales increased 5.1% to $67.7 million, while international sales fell 9.4% to $29.2 million. International sales were 30% of total sales, compared with 33%.
- Pump and pump-system sales rose to $82.5 million from $80.5 million; repair-parts and other sales declined to $14.3 million from $16.1 million.
- Water-market sales grew 4.7%, supported by municipal and construction demand. Non-water-market sales declined 8.8%; weakness included fire protection, agriculture, petroleum, industrial and OEM sales.
- Backlog was $120.8 million, up from $113.7 million at December 31, 2018 but below $127.3 million a year earlier. Incoming orders declined 5.2% year over year but rose 9.8% from Q4 2018; management noted increases across most markets, particularly municipal.
- Material inflation, tariffs and higher freight costs reduced gross margin. Selling-price increases introduced at the start of 2019 were not fully reflected in Q1 shipments because much of the quarter’s shipments came from 2018 backlog.
Outlook, risks and unusual items
Management expected margins to improve as recent price increases flowed through and said it would continue monitoring material costs and pricing. It described fundamentals as strong and cited the order increase from Q4, infrastructure needs, and potential acquisition and product-development opportunities. Planned 2019 capital expenditures were $15–$20 million, principally for building expansion and machinery and equipment, expected to be funded internally. The filing provides no quantified earnings or revenue guidance.
Management expected to continue regular quarterly dividends, subject to Board review and discretion. The Board authorized a $0.135-per-share dividend payable June 10, 2019. Key disclosed risks include raw-material availability and costs, competition, foreign exchange and international conditions, tariffs and trade-law compliance, acquisitions, cybersecurity, environmental liabilities, taxes, goodwill impairment and pension costs. The filing reported no material changes to previously disclosed legal proceedings or risk factors.
Q1 2018 included a $0.4 million pre-tax pension settlement charge ($0.3 million after tax); Q1 2019 had no settlement charge. The company adopted lease accounting guidance effective January 1, 2019, with an immaterial cumulative-effect adjustment. Management stated disclosure controls were effective as of March 31, 2019.
Investor facts to verify
- Whether price increases offset inflation, tariff and freight pressure, and whether gross margins recover in subsequent quarters.
- Whether incoming orders and backlog convert to shipments and revenue, particularly in municipal and other water markets.
- Whether international weakness and softness in fire protection, petroleum and other non-water markets persist.
- Cash-flow generation relative to planned $15–$20 million capital spending, dividends and any acquisition activity.
- The distinction between no bank borrowings and the company’s lease liabilities, letters of credit and available credit lines.