The Gorman-Rupp Company — Q2 2018 Form 10-Q
Business context and period: The company designs, manufactures and markets pumps and pump systems for water, wastewater and other liquid-handling applications. This unaudited filing covers the quarter and six months ended June 30, 2018; comparisons are with the corresponding 2017 periods unless noted. Amounts below are in millions of dollars except per-share data.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net sales | $111.8 | $97.9 | $208.4 | $190.5 |
| Gross profit / margin | $29.9 / 26.7% | $27.2 / 27.8% | $56.1 / 26.9% | $49.5 / 26.0% |
| Operating income / margin | $15.0 / 13.4% | $13.2 / 13.4% | $26.8 / 12.9% | $21.8 / 11.5% |
| Net income | $10.2 | $7.8 | $19.8 | $12.9 |
| Diluted earnings per share | $0.39 | $0.30 | $0.76 | $0.49 |
- Sales rose 14.3% in Q2 and 9.4% year to date. Q2 growth included higher domestic and international sales; water-market sales increased 17.3%, led by fire protection and municipal markets.
- Q2 gross margin fell 1.1 percentage points: half the decline reflected a favorable one-time legal-settlement comparison in 2017; the remainder was attributed mainly to product mix and, to a lesser extent, higher material costs. First-half gross margin improved 0.9 percentage points, mainly on favorable mix.
- First-half SG&A increased to $29.2 million from $27.7 million, but declined as a share of sales to 14.0% from 14.5%. Operating margin improved year over year in the first half; Q2 operating margin was unchanged.
- Effective tax rates were 19.2% in Q2 and 21.6% for the first half, versus 33.5% and 32.5%. The company attributed the decrease primarily to the 2017 Tax Act.
- Cash and cash equivalents were $83.7 million at June 30, 2018, versus $79.7 million at year-end 2017. The company reported no bank debt, $22.6 million available under credit lines after letters of credit, and compliance with debt covenants.
- First-half operating cash flow was $14.3 million, down from $24.0 million. Management cited higher receivables and inventory associated with sales and backlog growth, and higher income-tax payments. Capital expenditures were $5.5 million; cash dividends were $6.5 million. Cash increased $4.0 million over the period.
Changes, outlook and risks
- Backlog was $128.9 million at June 30, up 24.4% from a year earlier and from $114.0 million at December 31, 2017. The filing says substantially all remaining performance obligations are expected to be recognized as revenue within one year.
- Incoming orders increased 15% in the first half across most markets. Management was encouraged about the second half, while noting agriculture remained soft relative to historical levels.
- Management estimated a full-year effective tax rate of 23%–25% and planned 2018 capital expenditures of $10–$15 million, expected to be funded internally. No specific earnings or revenue forecast was provided.
- Management flagged higher material costs related to recent tariff increases and said it was monitoring their impact. Other disclosed risks include competitive markets, raw-material availability and cost, foreign-exchange and international-market exposure, acquisition integration, tax liabilities, environmental costs, cybersecurity, and pension settlement expense.
- Non-cash pension settlement charges were $2.2 million in Q2 and $2.6 million in the first half; reported EPS was reduced by $0.07 and $0.08, respectively. Management also presented adjusted EPS of $0.46 for Q2 and $0.84 for the first half, excluding those charges.
- The company adopted the revenue-recognition standard on January 1, 2018 using the modified retrospective method; the opening retained-earnings adjustment was immaterial. Revenue recognized over time for certain customized products was $0.5 million higher in Q2 than under prior guidance. The filing also notes provisional Tax Act estimates could be adjusted by year-end.
- The board authorized a quarterly dividend of $0.125 per share, payable September 10, 2018. Future dividends remain subject to board discretion.
Important facts for investors to verify
- Whether order growth and the elevated backlog convert into sales and cash as expected.
- How tariffs, material costs and product mix affect gross margins in subsequent quarters.
- Whether operating cash flow recovers as receivables and inventory increase with activity.
- Final Tax Act adjustments, the GILTI accounting policy decision and the full-year effective tax rate.
- The scale and recurrence of pension settlement charges, and the assumptions behind management’s adjusted, non-GAAP measures.