The Gorman-Rupp Company — 2016 Third-Quarter Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Unaudited consolidated results. The company designs and manufactures pumps and pump systems for water, wastewater, industrial, agricultural, petroleum, and other markets.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $91.3 million | $104.2 million | $287.9 million | $307.4 million |
| Gross profit / margin | $22.7 million / 24.8% | $23.3 million / 22.4% | $68.8 million / 23.9% | $71.4 million / 23.2% |
| Operating income / margin | $9.9 million / 10.8% | $8.9 million / 8.6% | $28.6 million / 9.9% | $29.4 million / 9.6% |
| Net income | $6.9 million | $5.9 million | $19.8 million | $19.8 million |
| EPS | $0.27 | $0.22 | $0.76 | $0.75 |
- Third-quarter sales fell 12.4% year over year; excluding the New Orleans Permanent Canal Closures & Pumps (PCCP) project, they declined 5.0%. Nine-month sales fell 6.3%, but increased 0.5% excluding PCCP.
- For the first nine months, operating cash flow was $52.2 million, versus $44.9 million in 2015. Investing activities used $4.3 million and financing activities used $8.2 million, primarily for dividends. Cash increased $40.0 million to $63.7 million.
- At September 30, cash was $63.7 million and the company reported no bank debt. It had $23.9 million available on credit lines after letters of credit. Working capital was a record $162.8 million. The company reported compliance with its restrictive covenants.
- Capital expenditures were $5.6 million for the first nine months; management expected fourth-quarter spending of $1–$3 million. Dividends paid were $8.2 million. The board declared a subsequent quarterly dividend of $0.115 per share, payable December 9, 2016.
Changes, drivers, and unusual items
- Lower PCCP shipments were a major contributor to reported sales declines. Domestic sales weakened; international sales rose 3.3% in Q3 but declined 2.8% for the nine-month period.
- Management cited softness in petroleum and industrial markets related to lower oil and gas activity, weaker agriculture demand associated with wet weather and lower farm income, and fire-protection market softness. Municipal wastewater orders showed improvement.
- Margins improved despite lower sales, reflecting favorable sales mix and LIFO adjustments, as well as the absence of prior-year non-cash pension settlement charges. Lower volume reduced operating leverage. A 2016 gain on sale of property and equipment also benefited earnings; management said it added $0.03 per share for both the quarter and nine-month period.
- Backlog was $102.8 million at quarter-end, versus $138.8 million a year earlier and $117.1 million at December 31, 2015. Excluding PCCP, backlog was down 16.0% year over year. About $1.2 million of PCCP orders remained and were expected to ship by year-end.
- The company contributed $8.0 million to its pension plan in the first nine months. Pension expense was lower than in 2015, when a settlement charge was recorded.
Outlook, risks, and contingencies
- Management said it did not yet see stable sales growth in the near future. It cited a typically slower fourth quarter, completion of most PCCP shipments, economic volatility, oil-price and production uncertainty, low commodity prices, and currency effects. It planned continued expense control and focus on operational efficiency.
- Longer-term opportunities identified include water and wastewater infrastructure rehabilitation, industrial and agricultural demand, new products, international expansion, and acquisitions. Management described the balance sheet as providing flexibility for these investments; these are expectations, not guarantees.
- Forward-looking risks include competition, foreign exchange and commodity volatility, government and regulatory changes, emerging-market conditions, execution and integration of acquisitions, and potential impairment of acquired goodwill or other assets if performance falls short.
- Management expected to continue regular dividends, but future declarations remain at the board’s discretion. The filing reported no material change in previously disclosed legal proceedings or other risk factors.
- The company was evaluating the impact of the new revenue-recognition standard and had not selected a transition method. It did not expect the cited lease and inventory standards to have a material impact.
Important facts for investors to verify
- Whether sales and order trends improved after quarter-end, particularly in municipal wastewater, petroleum, fire protection, and agricultural markets.
- Whether margin gains persist without the benefit of favorable LIFO adjustments, asset-sale gains, or the comparison against prior-year pension settlement charges.
- Whether backlog converts to revenue as expected, including shipment of remaining PCCP orders, and whether the fourth-quarter slowdown affected results.
- The durability of cash generation and liquidity after pension contributions, capital spending, dividends, and any future acquisitions.
- The cash-flow statement heading in the supplied filing text says “Nine Months Ended June 30,” although the figures and surrounding filing refer to the nine months ended September 30. Confirm the original filed statement for the correct caption.