Gorman-Rupp Company — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. Gorman-Rupp designs, manufactures and markets pumps and pump systems for water, wastewater, construction, industrial, agricultural and other applications. Results are unaudited and do not necessarily indicate full-year performance.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $100.3 million | $99.2 million | +1.0% |
| Gross profit / margin | $22.9 million / 22.8% | $23.9 million / 24.1% | Margin down 1.3 percentage points |
| Operating income / margin | $9.2 million / 9.2% | $10.6 million / 10.7% | Margin down 1.5 percentage points |
| Net income | $6.3 million | $7.3 million | Down 13.7% |
| Diluted earnings per share | $0.24 | $0.28 | Down $0.04 |
| Operating cash flow | $20.1 million | $9.0 million | Up $11.1 million |
Cost of products sold rose 2.7% to $77.4 million, faster than sales, primarily reflecting material costs and sales mix. SG&A increased 2.7% to $13.7 million, including higher professional fees and profit-sharing expense. The effective tax rate was 32.2%, versus 33.3%, reflecting a research and development tax credit and changes in the estimated domestic production activities deduction.
Liquidity, balance sheet and cash flow
- Cash and cash equivalents were $40.2 million at March 31, 2016, up from $23.7 million at year-end; cash and short-term investments totaled $40.5 million. The company reported no bank debt.
- Available bank lines of credit were $24.0 million after $7.0 million of outstanding letters of credit. The company said it complied with its restrictive covenants.
- Working capital reached a record $152.5 million, up $6.6 million from December 31, 2015. The current ratio was 4.3-to-1, compared with 4.4-to-1 at year-end.
- Operating cash flow of $20.1 million was driven principally by lower inventories, lower estimated income tax payments and higher accounts payable. Inventory declined to $77.3 million from $82.8 million at year-end.
- Capital additions were $1.2 million; management estimated 2016 net capital expenditures of $12 million to $14 million, expected to be financed principally with internally generated funds. Dividends paid were $2.7 million.
Material changes and operating trends
- Water-market sales increased 3.2%, with municipal sales up $1.2 million and fire-protection sales up $1.3 million. Lower construction sales, primarily associated with the oil and gas downturn, partly offset those gains.
- Non-water-market activity was broadly comparable with the prior-year quarter. Petroleum sales rose $1.7 million, while industrial sales fell $2.2 million, largely reflecting oil and gas market weakness.
- Domestic sales increased 3.9%; international sales declined 4.5%.
- Order backlog was $111.0 million, down from $158.9 million a year earlier and $117.1 million at December 31, 2015. The year-over-year decline primarily reflected about $34.2 million of PCCP project shipments in the prior 12 months and lower construction and industrial orders. First-quarter incoming orders increased $16.3 million from Q4 2015. The backlog included about $5.2 million of PCCP orders expected to ship by the end of Q3 2016.
Outlook, risks and other matters
Management described ongoing pressure from economic uncertainty, oil production and pricing, foreign-currency translation and low commodity prices, which may weigh on capital-goods investment through much of 2016. The company said it had reduced spending where practical and would continue to assess costs. Over the longer term, it sees growth opportunities in water and wastewater infrastructure, industrial and agricultural demand, international markets and new products; it expects reasonably comparable sales growth and operating margins over the long term, without providing specific numerical guidance.
Management expects to continue regular quarterly and annual dividend increases, subject to board review. The board declared a $0.105-per-share dividend payable June 10, 2016. Forward-looking risks include oil and commodity volatility, foreign exchange, competition, product development, emerging-market conditions, PCCP project delays, and acquisition availability and integration. The filing reported no material changes to previously disclosed legal proceedings or risk factors. Disclosure controls were judged effective at March 31, 2016.
Important facts for investors to verify
- Whether new orders convert into shipments and backlog stabilizes, particularly in construction, industrial and international markets.
- Whether gross margin recovers from the Q1 sales mix and material-cost pressure, and whether professional fees normalize.
- Timing and completion of the remaining PCCP shipments, including the approximately $5.2 million in backlog expected to ship by Q3 2016.
- Whether the $12 million to $14 million capital-expenditure estimate and dividend expectations remain consistent with cash generation and business conditions.
- The impact of continued oil and gas weakness, commodity prices, foreign exchange and other economic uncertainties on demand and results.