Gorman-Rupp Company — Q3 2017 Form 10-Q
Business and period: The Gorman-Rupp designs, manufactures, and markets pumps and pump systems for water, wastewater, construction, industrial, petroleum, agriculture, fire protection, and other applications. This unaudited filing covers the three and nine months ended September 30, 2017; results are not necessarily indicative of full-year performance. Dollar amounts below are in millions unless otherwise stated.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $94.0 | $91.3 | $284.5 | $287.9 |
| Gross profit / margin | $26.2 / 27.9% | $22.7 / 24.8% | $73.5 / 25.9% | $68.8 / 23.9% |
| Operating income / margin | $7.9 / 8.4% | $9.9 / 10.8% | $26.3 / 9.3% | $28.6 / 9.9% |
| Net income | $5.7 | $6.9 | $18.6 | $19.8 |
| Diluted earnings per share | $0.22 | $0.27 | $0.71 | $0.76 |
| Operating cash flow | Not reported quarterly | Not reported quarterly | $33.4 | $52.2 |
- Revenue and margins: Q3 sales rose 2.9%; excluding the New Orleans Permanent Canal Closures & Pumps (PCCP) project, sales increased 4.4%. Nine-month sales fell 1.2%, but increased 1.9% excluding PCCP. Gross margin improved in both comparisons; management attributed the underlying improvement to favorable mix and lower manufacturing overhead, with nine-month gains also reflecting labor efficiency and lower warranty expense.
- Earnings and unusual items: GAAP operating income and net income declined despite higher gross profit. Q3 included $4.1 million of noncash goodwill and intangible impairment charges and a $0.4 million pension settlement charge; the nine-month period included the same impairment and $3.8 million of pension settlement charges. Management’s non-GAAP adjusted EPS was $0.33 for Q3 and $0.91 for nine months, versus $0.27 and $0.76, respectively, in 2016. Adjusted EBITDA, as presented by the company, was $16.5 million and $46.4 million, versus $14.2 million and $40.9 million.
- Cash, liquidity, and debt: Cash and cash equivalents were $76.0 million at September 30, up from $57.6 million at year-end 2016; the company reported no bank debt. It had $22.3 million available under bank lines after $8.7 million of letters of credit. Working capital was $177.8 million, up $23.3 million from year-end. Nine-month operating cash flow was $33.4 million; capital expenditures were $4.8 million and cash dividends were $9.0 million. Company-defined non-GAAP free cash flow was $32.6 million versus $27.1 million.
- Balance sheet and shareholder returns: Total assets were $396.7 million and total liabilities $77.7 million at September 30. The board declared a quarterly dividend of $0.125 per share, an 8.7% increase from the prior quarter, payable December 8, 2017.
Material changes and business developments
- Q3 domestic sales excluding PCCP rose 3.5%, and international sales rose 6.0%. Strength in construction, industrial, petroleum, and OEM markets was offset in part by weakness in municipal and fire-protection sales. For nine months, international sales excluding PCCP increased 5.2%, while domestic sales were nearly flat.
- Lower oil prices and excess inland-barge capacity reduced marine barge-pump demand. The resulting reassessment of Bayou City Pump Company’s prospects led to a $4.1 million noncash impairment, writing off its remaining goodwill and customer-relationship intangible assets.
- Order backlog was $111.4 million at September 30, 2017, versus $102.8 million a year earlier and $98.8 million at December 31, 2016. Excluding the PCCP project in the 2016 comparison, backlog increased 9.6% year over year.
- Nine-month operating cash flow declined from 2016, when cash generation benefited from inventory reductions and customer deposits; 2017 cash flow was affected by reduced commissions payable and working-capital movements. The company also invested $3.0 million in short-term investments.
Outlook, risks, and other matters
- Management said business conditions were improving, expressed optimism about incoming orders, and noted increased capital spending in oil- and gas-related industries. It remained cautious about oil-price and commodity uncertainty, and said PCCP project completion makes 2017 revenue comparisons with 2016 require adjustment. No specific revenue or earnings guidance was provided.
- Management planned 2017 capital expenditures of $6 million to $8 million, expected to be funded internally, and said it would continue to focus on efficiency and expense control while evaluating acquisitions and product development.
- Disclosed risks include competition, raw-material availability, foreign currency and country conditions, environmental and regulatory costs, cybersecurity, acquisition integration, pension settlement expense, and potential further intangible-asset impairment. Foreign-exchange transaction gains were $0.4 million in each nine-month comparison period. The filing reported no material changes to previously disclosed legal proceedings or risk factors.
- The company expected no material financial-statement impact from adopting the new revenue-recognition standard, but its assessment was ongoing; it planned to use the modified retrospective method. Management also expected no material impact from the new lease standard.
Important facts for investors to verify
- Whether backlog converts to sales and whether the improving order trend persists, particularly in oil-and-gas-related markets.
- Whether Bayou City’s marine-market demand stabilizes and whether further impairment charges arise.
- How operating cash flow develops given the substantial year-over-year decline and movements in commissions, inventory, and other working-capital accounts.
- Whether gross-margin gains persist and how pension-related costs affect reported results.
- Whether the company maintains its dividend and planned capital spending while pursuing acquisition and product-development opportunities.