The Gorman-Rupp Company — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. Unaudited consolidated results; dollar amounts below are in millions unless stated otherwise. The company designs, manufactures and markets pumps and pump systems across water, industrial and other end markets.
Financial performance
- Third quarter: Sales were $104.2 million, down 5.4% from $110.2 million. Gross profit was $23.3 million and gross margin 22.4%, versus $28.1 million and 25.5%. Operating income was $8.9 million (8.6% margin), versus $14.0 million (12.7%). Net income was $5.9 million, down 37.6%, and diluted earnings per share were $0.22 versus $0.36.
- First nine months: Sales were $307.4 million, down 6.8% from $330.0 million. Gross profit was $71.4 million and gross margin 23.2%, versus $82.5 million and 25.0%. Operating income was $29.4 million (9.6% margin), versus $42.1 million (12.8%). Net income was $19.8 million, down 29.9%, and earnings per share were $0.75 versus $1.08.
- Cash flow: Nine-month operating cash flow was $44.9 million, compared with $24.8 million in 2014. Investing used $10.0 million, including $6.6 million of capital expenditures and the $3.4 million Hydro acquisition. Financing used $24.5 million, including $7.9 million of dividends, $12.0 million of debt repayment and $4.6 million for a privately arranged share purchase. Cash increased $9.3 million to $33.8 million.
- Balance sheet and liquidity: At September 30, cash was $33.8 million; short-term debt was $2.0 million, down from $12.0 million at December 31, 2014. Current assets were $200.2 million and current liabilities $52.8 million; working capital was $147.4 million and the current ratio 3.8-to-1. The company reported $24.0 million available under bank lines after $6.0 million of letters of credit and said it complied with its debt covenants.
- Shareholder returns: Dividends per share were $0.10 in Q3 and $0.30 for the first nine months, versus $0.09 and $0.27, respectively, in 2014. The board declared a $0.105 quarterly dividend in October, a 5% increase from the prior quarter.
Changes, unusual items and business drivers
- Management attributed weaker sales and margins primarily to lower volume, a mix shift toward lower-margin engine- and motor-equipped systems, and pension costs. Unfavorable currency translation accounted for $1.7 million of the Q3 sales decline and $6.0 million of the nine-month decline.
- Reduced oil and gas activity pressured construction, rental and industrial markets; wet weather and lower commodity prices weighed on agriculture. Municipal sales were affected by lower demand and limited government funding. Fire protection sales increased.
- Increased retirements and related lump-sum pension payments triggered a non-cash settlement charge of $1.9 million in Q3 and $3.3 million for the first nine months. Management said the charge reduced Q3 EPS by $0.05 and nine-month EPS by $0.09, and expected an additional approximately $1.0 million charge in Q4.
- September 2015 acquisition of Belgian distributors Hydro+ SA and Hydro+ Rental SPRL: $3.4 million cash consideration and $2.0 million of assumed bank debt; preliminary goodwill was $2.6 million. Their combined annual revenue was approximately $4.0 million. Purchase accounting remained preliminary.
- Backlog was $138.8 million at September 30, versus $170.0 million a year earlier and $160.7 million at year-end 2014. Management said the year-over-year decline primarily reflected $37.5 million of PCCP project shipments over the prior 12 months. The quarter had the highest incoming orders of the last four quarters. PCCP orders remaining in backlog were $17.8 million, with $8.1 million scheduled to ship in Q4 2015 and $9.7 million of installation services scheduled in the first three quarters of 2016.
Outlook, risks and other disclosures
Management expected near-term conditions, including most of 2016, to remain challenging, citing oil and gas weakness, a strong U.S. dollar, and agricultural headwinds. It expected gradual improvement in fire and municipal pump sales and said the PCCP project was expected to remain on schedule through the remainder of 2015 and 2016. The company projected Q4 2015 capital expenditures of $2–$4 million, funded from internally generated cash. Its longer-term outlook was positive, with opportunities in water and wastewater infrastructure, international markets and new products; these are forward-looking expectations, not guarantees.
Principal disclosed uncertainties include economic and market conditions, competition, new-product execution, government and emerging-market conditions, PCCP project delays, and the ability to complete and integrate acquisitions. Management reported effective disclosure controls and no material change in internal control over financial reporting. No material changes to previously reported legal proceedings or risk factors were disclosed.
Investor verification points
- Track order intake, backlog conversion and timing of the remaining PCCP shipments and installation services.
- Assess whether sales volumes and margins recover, particularly in construction, municipal, industrial and agriculture markets, and whether sales mix improves.
- Verify the expected Q4 pension settlement charge and its effects on costs, earnings and pension obligations.
- Review final Hydro acquisition purchase accounting and integration, and the company’s capital spending and cash-generation plans.
- Monitor the impacts of currency movements, oil and gas conditions, and the declared dividend against future financial performance.