Business context and reporting period
The Gorman-Rupp Company manufactures pumps and pumping systems. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2014, compared with the same periods in 2013; balance-sheet figures are compared with December 31, 2013. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $110.2m | $101.2m | $330.0m | $300.1m |
| Gross profit / margin | $28.1m / 25.5% | $24.5m / 24.2% | $82.5m / 25.0% | $72.2m / 24.1% |
| Operating income / margin | $14.0m / 12.7% | $12.0m / 11.9% | $42.1m / 12.8% | $33.8m / 11.3% |
| Net income | $9.4m | $7.9m | $28.3m | $22.9m |
| Earnings per share | $0.36 | $0.30 | $1.08 | $0.87 |
For the first nine months, operating cash flow was $24.8m, versus $37.7m in 2013; investing cash outflow was $24.0m versus $5.1m, largely reflecting the Bayou City Pump acquisition. Financing provided $1.1m, compared with $19.3m used in 2013. Cash and cash equivalents on the balance sheet were $33.2m at September 30. Short-term debt was $17.2m; available bank lines were $25.7m after letters of credit. Working capital was $134.4m, and the current ratio was 2.9:1. The company reported compliance with its restrictive covenants.
Material changes and drivers
- Q3 sales rose 8.9% and nine-month sales rose 10.0%. Domestic sales increased 13.5% and 15.2%, respectively; international sales were comparable with prior-year periods.
- Growth was led by municipal water and wastewater, flood-control, and industrial shipments associated with fracking and the Bayou City Pump acquisition. Agriculture sales were lower amid wet weather; Q3 OEM sales also declined.
- Gross margin improved, principally from product mix and the absence of 2013 pension-settlement charges. The 2013 charges reduced Q3 gross and operating margins by 30 and 50 basis points, and nine-month margins by 70 and 110 basis points, respectively. Thus, year-over-year earnings comparisons benefit partly from a nonrecurring prior-year charge.
- Q3 SG&A rose 12.8% year over year, with compensation, professional services, and depreciation among the cited factors. Nine-month SG&A as a share of sales declined to 12.2% from 12.8%, reflecting sales leverage and the absence of prior-year pension charges.
- Bayou City Pump was acquired in June for cash, financed with an $18.0m short-term unsecured bank loan. The acquired business had approximately $16m of 2013 revenue; pro forma results were not provided because the acquisition was not considered material to consolidated results.
- Backlog was $170.0m at September 30, down from $182.2m at year-end, which management attributed principally to record shipments. It included $50.1m remaining on the New Orleans flood-control project.
Outlook, risks, and other items
Management said it expects long-term organic growth at generally comparable operating margins, citing water and wastewater infrastructure needs and demand across industrial, construction, and agricultural applications. No specific full-year revenue or earnings guidance was provided. Estimated 2014 net capital expenditures were $11m–$13m, expected to be funded principally with internally generated cash. Management expected the remaining New Orleans project backlog to ship in Q4 2014 and throughout 2015.
The Board declared a subsequent quarterly dividend of $0.10 per share, an 11.1% increase from the prior quarter, payable December 10, 2014. Management noted that future dividends remain subject to Board discretion. Disclosed risks include economic and spending conditions, competition, new-product execution, regulatory and emerging-market conditions, timing or disruption of the New Orleans project, and acquisition execution and integration. The filing reported no material changes to previously disclosed legal proceedings or risk factors; disclosure controls were deemed effective.
Other items include a $1.9m Q3 currency-translation loss in other comprehensive income and a $2.1m nine-month translation loss. The company said it did not expect adoption of the new revenue-recognition standard to have a material impact.
Important facts for investors to verify
- Whether municipal, industrial/fracking, and acquisition-related demand continues, and whether weaker agriculture and Q3 OEM sales persist.
- Conversion of the $170.0m backlog, particularly the timing and execution of the $50.1m remaining New Orleans project.
- Cash generation and working-capital trends: operating cash flow fell year over year while receivables increased; confirm the cash required for planned investment and dividends.
- Debt and liquidity following the acquisition, including the short-term borrowing balance and available credit capacity.
- Underlying earnings and margins excluding the favorable comparison against 2013 pension-settlement charges; also monitor tax-rate effects, including the unavailable federal R&D tax credit cited by management.
- The balance sheet reports cash of $33.196m, while the cash-flow statement reports period-end cash of $32.940m; reconcile this difference when reviewing the detailed filing.