The Gorman-Rupp Company — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Unaudited results; amounts are in U.S. dollars unless noted. Gorman-Rupp designs and manufactures pumps and pump systems. The company attributed weaker demand principally to COVID-19 and softness in oil and gas markets.
Financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $89.0 million | $99.3 million | $266.5 million | $304.5 million |
| Gross profit / margin | $23.0 million / 25.8% | $25.8 million / 26.0% | $68.3 million / 25.6% | $77.3 million / 25.4% |
| Operating income / margin | $9.7 million / 10.9% | $11.6 million / 11.7% | $27.3 million / 10.3% | $33.8 million / 11.1% |
| Net income | $7.3 million | $9.8 million | $18.4 million | $27.5 million |
| Diluted earnings per share as reported | $0.28 | $0.37 | $0.70 | $1.05 |
- Q3 sales fell 10.4% year over year; nine-month sales fell 12.5%. For Q3, domestic sales decreased 8.9% and international sales decreased 13.8%. International sales were 29% of total sales.
- Q3 adjusted EPS, excluding the pension settlement charge, was $0.31 versus $0.37; nine-month adjusted EPS was $0.83 versus $1.05. Adjusted EBITDA was $13.3 million for Q3 and $37.0 million for nine months, compared with $15.4 million and $45.1 million, respectively.
- Q3 gross margin declined 20 basis points, in part because a favorable prior-year LIFO impact did not recur and lower volume reduced fixed-cost leverage. Nine-month gross margin improved 20 basis points, helped by lower material costs and favorable mix. Operating margin declined 80 basis points in both comparisons.
- Cash dividends were $0.145 per share in each 2020 quarter reported. On October 22, the board declared a $0.16-per-share quarterly dividend payable December 10, 2020, subject to the stated record date.
Cash flow, liquidity and balance sheet
- At September 30, cash and equivalents were $93.7 million, up $13.1 million from year-end 2019. The company reported no bank debt and $24.7 million available under bank lines after $6.3 million of letters of credit.
- Nine-month operating cash flow was $31.4 million, down from $58.3 million in 2019. Management cited lower sales volume, increased inventories and lower accounts receivable as drivers of the decrease. Capital expenditures were $6.3 million; cash dividends were $11.3 million.
- Company-defined non-GAAP free cash flow was $19.4 million versus $26.5 million, after capital expenditures and dividends. Current assets were $241.4 million and current liabilities $46.0 million. Total liabilities were $73.8 million; total equity was $319.6 million.
- Backlog was $102.0 million at quarter-end, versus $101.4 million a year earlier and $105.0 million at December 31, 2019. Substantially all remaining performance obligations were expected to be recognized as revenue within one year.
Material changes, outlook and risks
- Revenue declined across most markets. Q3 non-water sales fell 21.6%, with weakness in industrial, OEM and petroleum; water-market sales fell 5.2%. Oil and gas softness and pandemic-related demand effects were significant factors.
- SG&A decreased in dollars due to lower payroll-related and travel expenses and cost management, but rose as a share of sales because of lower volume. Nine-month incoming orders were down 10.1% year over year; management said orders stabilized in Q3.
- Other expense included non-cash pension settlement charges of $1.0 million in Q3 and $4.4 million for nine months, following lump-sum retiree distributions. These reduced reported EPS by $0.03 and $0.13, respectively. The nine-month net-income decline included a $3.5 million after-tax settlement charge.
- Management expected near-term sales to remain challenging, with reduced demand likely to continue into Q4 2020. The pandemic’s duration and financial impact could not be reasonably estimated and could be material. Manufacturing facilities and the supply chain remained operational; management cited liquidity and financial flexibility as support for meeting anticipated funding needs.
- Planned full-year 2020 capital expenditures were $8–$10 million, expected to be funded internally. The company said it expected to continue regular quarterly dividends, but future declarations remain at the board’s discretion.
- Risks identified include COVID-19 and economic conditions, competition, raw-material availability and cost, foreign exchange, international markets, cybersecurity and intellectual property, acquisitions, environmental and regulatory costs, goodwill or intangible impairment, pension expense, and family ownership of common equity. No material change in previously reported legal proceedings was disclosed.
Important facts for investors to verify
- Whether demand, incoming orders and backlog recovered or weakened after quarter-end, particularly in oil and gas, OEM and international markets.
- How much subsequent results reflect volume and fixed-cost absorption versus material costs, mix and expense controls.
- The cash-flow trajectory and inventory levels, and whether planned capital spending and dividends remain supported by internally generated cash.
- The sensitivity of pension costs and settlement charges to future retiree distributions and actuarial assumptions.
- The assumptions behind management’s pandemic-related outlook and the company’s ability to maintain operations and supply continuity.