The Gorman-Rupp Company — Q2 2019 Form 10-Q
Business and period: Pump and pump-system designer and manufacturer. This unaudited filing covers the three and six months ended June 30, 2019, compared with the corresponding 2018 periods. Amounts below are in millions of dollars except per-share data.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $108.3 | $111.8 | $205.2 | $208.4 |
| Gross profit / margin | $28.2 / 26.0% | $29.9 / 26.7% | $51.5 / 25.1% | $56.1 / 26.9% |
| Operating income / margin | $13.2 / 12.2% | $15.0 / 13.4% | $22.2 / 10.8% | $26.8 / 12.9% |
| Net income | $10.5 | $10.2 | $17.7 | $19.8 |
| EPS | $0.40 | $0.39 | $0.68 | $0.76 |
Q2 sales fell 3.1% year over year; domestic sales grew 4.6%, while international sales fell 16.8%. For the first half, sales declined 1.6%, with domestic sales up 4.8% and international sales down 13.5%. Pump and pump-system sales were $92.2 million in Q2 (versus $97.8 million); repair parts and other sales rose to $16.2 million (from $14.0 million). International sales were 31% of Q2 revenue, versus 36% a year earlier.
For the first half, gross margin contracted 180 basis points, mainly from inflation, tariffs and higher freight costs; the company said beginning-of-year price increases were more fully realized in Q2. Q2 gross margin was down 70 basis points, principally because lower sales reduced operating leverage. Q2 net income rose 3.0% despite lower operating income, largely because the 2018 quarter included a non-cash pension settlement charge. First-half 2018 EPS included a $0.08 pension settlement charge; adjusted EPS was $0.68 in 2019 versus $0.84 in 2018.
Cash, liquidity and balance sheet
- Cash and equivalents were $62.2 million at June 30, 2019, up $15.7 million from year-end. Current assets were $220.9 million and current liabilities $49.1 million.
- Operating cash flow for the first half was $26.5 million, versus $14.3 million in 2018. Investing used $3.5 million, primarily for capital additions; financing used $7.5 million, primarily dividends. Capital expenditures were $3.5 million, versus $5.5 million.
- Company-defined non-GAAP free cash flow was $19.3 million, versus $23.1 million. The measure is adjusted EBITDA less capital expenditures and dividends.
- The company reported no bank debt. It had $24.0 million available under bank lines after $7.0 million of letters of credit. Lease liabilities totaled $1.9 million following adoption of the new lease standard. The company reported compliance with debt covenants.
Outlook, risks and notable items
- Management said softer incoming orders would make second-half top-line growth more challenging. Backlog was $107.0 million at June 30, down 17.0% from $128.9 million a year earlier and below $113.7 million at year-end. The decline reflected weaker orders in fire protection, construction, industrial and municipal markets.
- Management cited global economic conditions affecting international orders, adverse U.S. weather weighing on construction and agriculture, and uncertainty over trade policy and potential tariffs. Material costs had generally stabilized since late 2018, but tariff uncertainty remained.
- Planned 2019 capital expenditures were $15–$20 million, mainly for building expansion and machinery and equipment, expected to be funded internally. Management cited acquisition and product-development opportunities, and potential longer-term support from flood-control infrastructure spending.
- The board authorized a $0.135-per-share quarterly dividend payable September 10, 2019. Future dividends remain subject to board discretion.
- Foreign-currency transaction gains were $74,000 in the first half, versus a $0.5 million loss in 2018. Management identified raw-material costs and pricing, competition, foreign exchange, international conditions, acquisitions, taxes, pension costs and other factors as risks. The filing reported no material changes to previously disclosed legal proceedings or risk factors.
Facts for investors to verify
- Whether order trends and backlog stabilize, particularly in international, fire-protection, construction, industrial and municipal markets.
- Whether pricing offsets inflation, tariffs and freight costs and supports margin recovery.
- Execution and funding of the $15–$20 million capital-spending plan, while sustaining cash generation and dividends.
- The comparability of earnings: 2018 results included non-cash pension settlement charges, and management presents adjusted non-GAAP measures.