Gorman-Rupp Company — Q1 2014 Form 10-Q
Period: Three months ended March 31, 2014; unaudited consolidated results, compared with Q1 2013. Gorman-Rupp manufactures pumps and pump systems. Amounts below are in millions of dollars except per-share data.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Net sales | $110.1 | $92.5 | +19.0% |
| Gross profit / margin | $27.6 / 25.0% | $21.2 / 23.0% | Margin +2.0 pts |
| Operating income / margin | $14.7 / 13.3% | $8.3 / 8.9% | Margin +4.4 pts |
| Net income / net margin | $10.0 / 9.0% | $5.8 / 6.3% | +71.1% |
| Earnings per share | $0.38 | $0.22 | +$0.16 |
| Operating cash flow | $(1.4) | $3.7 | Decreased $5.0 |
Income before taxes was $14.8 million versus $8.2 million. The effective tax rate increased to 32.9% from 29.3%; management attributed the difference primarily to the timing and availability of the federal research and development tax credit. SG&A was $12.9 million, down slightly from $13.0 million.
Liquidity, debt, and cash flow
- At March 31, cash and short-term investments totaled $22.0 million; short-term bank debt was $5.2 million, down from $9.0 million at year-end.
- Undrawn bank lines totaled $26.1 million after $3.9 million of outstanding letters of credit. The company reported compliance with its restrictive covenants.
- Working capital reached a record $135.5 million, up 5.4% from December 31. The current ratio was 3.4 to 1, compared with 3.1 to 1 at year-end.
- Operating cash use primarily reflected a $12.5 million increase in receivables associated with record sales. Investing cash use was $1.6 million, principally capital expenditures; financing cash use was $6.5 million, including $2.7 million of dividends and $3.8 million of debt repayment.
- Cash and cash equivalents declined $9.4 million during the quarter to $21.8 million.
Business trends and material changes
- Domestic sales rose 28.0% ($15.7 million) and international sales rose 5.3% ($1.9 million). Water-market sales increased $12.0 million, led by construction, fire, and municipal demand; non-water sales increased $5.6 million, primarily in OEM power-generation and military applications.
- Management cited stronger sales and favorable sales mix for improved gross margin. Q1 2013 margins and earnings were also depressed by a noncash pension settlement charge that did not recur in 2014; the charge reduced 2013 gross and operating margins by 0.9 and 1.5 percentage points, respectively, and EPS by $0.04.
- Backlog was $171.7 million at March 31, down from $182.2 million at December 31, principally because of record shipments. Incoming orders grew 19% versus the prior quarter. Backlog included $56.1 million remaining on a New Orleans flood-control pump project, with shipments expected mainly in the second half of 2014 and first half of 2015.
Outlook, risks, and other disclosures
- Management expects 2014 net capital expenditures of $12–$14 million, principally for machinery, equipment, and building improvements, funded mainly with internally generated funds. It described long-term organic growth opportunities in water and wastewater infrastructure and industrial and agricultural pump demand, while expecting generally comparable operating margins over the long term. No specific near-term revenue or earnings forecast was provided.
- The Board declared a $0.09-per-share quarterly dividend payable June 10, 2014; the company noted this would be its 257th consecutive dividend. Future dividends remain at the Board’s discretion.
- Forward-looking risks include economic and spending conditions, competition, successful new-product launches and expansion into emerging markets, regulatory and tax changes, and possible delays or disruptions to the New Orleans flood-control project. The company reported no material changes to previously disclosed legal proceedings or risk factors.
- Management stated disclosure controls were effective as of March 31, 2014. The company implemented a new enterprise performance management system during the quarter and reported no material adverse effect on internal control over financial reporting.
Investor verification priorities
- Assess whether Q1 sales and margin gains are sustainable, separating underlying performance and mix from the absence of the prior-year pension settlement charge.
- Monitor receivables, operating cash conversion, and cash levels as record sales are collected.
- Track orders and backlog conversion, especially timing and execution of the New Orleans project.
- Confirm delivery of the $12–$14 million capital spending plan, covenant compliance, and the company’s capacity to maintain dividends.