Gorman-Rupp Company — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. The company designs, manufactures and markets pumps and pump systems for water, wastewater, industrial, construction, agricultural and other markets. Financial statements are unaudited.
Financial performance
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Net sales | $96.3 million | $103.9 million | $196.5 million | $203.1 million |
| Gross margin | 24.1% | 23.2% | 23.5% | 23.7% |
| Operating income | $9.5 million | $9.9 million | $18.8 million | $20.5 million |
| Operating margin | 9.9% | 9.5% | 9.5% | 10.1% |
| Net income | $6.6 million | $6.6 million | $12.9 million | $13.9 million |
| Earnings per share | $0.25 | $0.25 | $0.49 | $0.53 |
- Second-quarter sales declined 7.3%; excluding the New Orleans Permanent Canal Closures and Pumps (PCCP) project, sales increased 1.7%. First-half sales fell 3.3%, but rose 3.3% excluding PCCP.
- Water-market sales declined 12.0% in Q2 and 5.7% in the first half. Non-water sales increased 5.6% and 3.1%, respectively. Management cited lower PCCP shipments, weaker fire-protection and agriculture sales, and oil-and-gas-related weakness; OEM sales were a source of growth.
- Q2 gross margin improved year over year, principally from sales mix and the absence of a 2015 pension settlement charge. First-half gross margin slipped as sales mix, warranty costs and depreciation more than offset lower labor costs.
- Six-month operating cash flow was $33.6 million, versus $17.5 million a year earlier. Capital additions were $2.5 million; dividends paid were $5.5 million. Cash increased to $49.5 million from $23.7 million at year-end 2015.
- At June 30, the company had no bank debt and $24.0 million available under bank lines after $7.0 million of letters of credit. Working capital was $155.7 million; the current ratio was 4.3 to 1. Total liabilities were $75.8 million and total equity was $296.2 million.
Changes, outlook and risks
- Q2 net income was essentially flat year over year despite lower sales; Q2 2015 included a non-cash pension settlement charge that reduced EPS by $0.04. First-half net income declined 7.2% and EPS declined from $0.53 to $0.49.
- Backlog was $107.7 million at June 30, down from $144.2 million a year earlier and $117.1 million at December 31, 2015. Excluding PCCP orders, backlog was down 10.1% year over year. Approximately $2.7 million of PCCP orders remained and were expected to ship by the end of Q3.
- Management said it did not yet see stable sales growth in the near term, citing economic volatility, oil-market conditions, foreign exchange and low commodity prices. It expects the second half to be seasonally slower and to compare against a 2015 period with substantial PCCP sales. The company plans to control costs while pursuing longer-term organic growth, acquisitions and product development; no specific full-year revenue or earnings guidance was provided.
- Management estimated 2016 net capital expenditures of $7 million to $10 million, expected to be funded primarily from internally generated cash. The board declared a quarterly dividend of $0.105 per share on July 28, payable September 9, 2016.
- Key disclosed uncertainties include foreign exchange and commodity prices, domestic oil activity, competition, new-product execution, emerging-market conditions, delays or shipment revisions on PCCP, and acquisition integration. The company reported no material changes to previously disclosed legal proceedings or risk factors. Disclosure controls were assessed as effective; no material change in internal control was reported.
Important facts for investors to verify
- Whether underlying sales growth excluding PCCP continues, particularly in water markets, and whether the lower backlog converts to orders and shipments.
- Progress and timing of the remaining PCCP work, including the expected Q3 shipments and any schedule or execution changes.
- Whether margins and earnings hold up amid sales-mix shifts, warranty costs, and the absence of the prior-year pension settlement charge.
- Cash-flow sustainability, planned capital spending, pension funding needs, and continued dividend capacity.
- Potential effects of oil and commodity conditions, foreign exchange, and acquisitions on results; the filing provides no quantified full-year earnings or sales outlook.