Gorman-Rupp Company — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. The company designs, manufactures and markets pumps and pump systems for water, wastewater, construction, industrial, agricultural and other applications. Unaudited results are not necessarily indicative of full-year results. Dollar amounts below are in millions unless stated otherwise.
Financial results
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Net sales | $99.2 | $110.1 |
| Gross profit / margin | $23.9 / 24.1% | $27.6 / 25.0% |
| Operating income / margin | $10.6 / 10.7% | $14.7 / 13.3% |
| Net income / net margin | $7.3 / 7.3% | $10.0 / 9.0% |
| Earnings per share | $0.28 | $0.38 |
| Operating cash flow | $9.0 | $(1.4) |
Sales fell 9.8%; net income declined 26.9%. Management attributed lower earnings and margins mainly to reduced sales volume. SG&A rose 3.5% to $13.3 million and increased to 13.4% of sales from 11.7%. The effective tax rate was 33.3%, versus 32.9%; the difference primarily reflected the federal R&D tax credit not having been extended for 2015.
Liquidity, debt and cash flows
At March 31, cash and cash equivalents were $27.3 million, short-term debt was $9.0 million, and current assets and liabilities were $205.2 million and $63.7 million, respectively. The current ratio was 3.2 to 1. The company reported $24.3 million available under bank lines after letters of credit; it was in compliance with its restrictive covenants. Working capital reached a record $141.5 million, up $5.1 million from year-end, principally due to work-in-process inventory for the PCCP project.
Q1 operating cash flow was $9.0 million, capital additions were $1.4 million, and financing cash outflow was $5.6 million, including $2.6 million of dividends and $3.0 million of debt repayment. Cash increased $2.8 million during the quarter. Management estimated 2015 capital expenditures of $13–$15 million, expected to be funded with internally generated cash.
Changes, outlook and risks
Sales decreased across several markets. Management cited the rapid decline in oil and gas production and adverse winter conditions; lower construction and rental, agricultural, municipal, fire-protection and OEM sales; wet weather and weak farm income; and the strong U.S. dollar. Domestic sales declined 9.3% and international sales 10.9%; currency translation accounted for $2.2 million, or 20.4%, of the total sales decline. Increased health-care expenses also pressured margins. Other comprehensive loss was $2.6 million, principally from $2.8 million of currency translation adjustments.
Backlog was $158.9 million, compared with $171.7 million a year earlier and $160.7 million at December 31, 2014. It included $39.1 million for the New Orleans Permanent Canal Closures and Pumps project, expected to ship through the first half of 2016. First-quarter incoming orders were comparable with the prior-year quarter and $2.2 million above Q4 2014. Management expected the PCCP project to remain on schedule, gradual improvement in fire and municipal sales, and longer-term growth from infrastructure needs, new products and acquisitions. It also cited ongoing headwinds from oil-market weakness, foreign exchange, agricultural conditions and global economic uncertainty; project delays, competition, product launches and acquisition execution were among the stated risks. No material changes to previously reported legal proceedings or risk factors were disclosed.
The board authorized a quarterly dividend of $0.10 per share on April 23, 2015. The company reported that ASU 2014-09, the new revenue recognition standard, was not expected to have a material impact; it was effective for the company’s fiscal years beginning after December 15, 2016. Management reported disclosure controls effective as of March 31, 2015 and no material change in internal control over financial reporting.
Key facts for investors to verify
- Whether demand and order trends recover in oil-related, construction, agricultural, municipal and international markets, and whether currency effects persist.
- Timing and execution of the $39.1 million PCCP backlog and the extent to which it converts to shipments and cash.
- Whether lower volume continues to pressure gross and operating margins, including health-care costs.
- Whether the $13–$15 million capital-expenditure plan and dividends remain supportable by operating cash flow and available liquidity.
- Any changes in bank-line availability, covenant compliance, or the risks and assumptions underlying management’s outlook.