The Gorman-Rupp Company — Q1 2017 Form 10-Q
Business and period: The company designs, manufactures and markets pumps and pump systems for water, wastewater, construction, industrial and other liquid-handling markets. This unaudited report covers the three months ended March 31, 2017, compared with the same 2016 period; balance-sheet amounts are compared with December 31, 2016. Unless noted otherwise, financial amounts below are in millions of dollars.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $92.6 | $100.3 | Down 7.6% |
| Gross profit / margin | $21.2 / 22.9% | $22.9 / 22.8% | Profit down $1.7 |
| Operating income / margin | $7.0 / 7.5% | $9.2 / 9.2% | Down 24.4% |
| Net income | $5.1 | $6.3 | Down 19.4% |
| Diluted earnings per share | $0.19 | $0.24 | Down $0.05 |
| Operating cash flow | $7.6 | $20.1 | Down $12.5 |
| Capital expenditures | $2.0 | $1.2 | Up $0.7 |
| Cash dividends paid | $3.0 | $2.7 | Up $0.3 |
At March 31, cash and cash equivalents were $60.5 million; the company reported no bank debt and $24.1 million available under bank lines after $6.9 million of letters of credit. Working capital was $160.6 million, up $6.0 million from year-end. Total assets were $386.3 million and total liabilities were $79.5 million. Cash increased $2.8 million during the quarter to $60.5 million. The quarterly dividend was $0.115 per share, versus $0.105 a year earlier.
Management’s non-GAAP adjusted EPS was $0.23, excluding a $0.04-per-share non-cash pension settlement charge, versus $0.24 in Q1 2016. Adjusted EBITDA was $12.8 million versus $13.1 million. Company-defined non-GAAP free cash flow was $7.8 million versus $9.2 million; these measures are not GAAP and are defined by management.
Material changes and drivers
- Sales excluding the New Orleans Permanent Canal Closures & Pumps (PCCP) project declined 2.9%. PCCP sales were $0.4 million in Q1 2017 versus $5.3 million a year earlier, contributing to the reported sales decline.
- Excluding PCCP, domestic sales fell 5.8%, while international sales rose 2.6%. Construction and repair-parts sales increased; municipal, fire-protection and agriculture sales declined. Industrial and OEM sales improved, offset by lower petroleum sales.
- Gross margin was 22.9%, including a $1.1 million pension settlement charge (about 110 basis points). Excluding that charge, management said gross margin improved 120 basis points, principally from favorable mix, partly offset by higher healthcare costs and reduced overhead leverage.
- SG&A rose 4.0% to $14.2 million and was 15.3% of sales, including a $0.6 million pension settlement charge. Operating income also included these charges, which totaled $1.7 million, and was pressured by lower sales volume and operating leverage.
- Backlog was $96.9 million at March 31, 2017, versus $111.0 million a year earlier and $98.8 million at December 31, 2016. Excluding PCCP, backlog was down 8.6% year over year; management cited lower petroleum and fire-protection orders.
- Operating cash flow was lower year over year, with increased receivables partly offset by reduced inventory and prepaid income taxes. Q1 2016 cash flow included a $2.0 million pension contribution, compared with none in Q1 2017.
Outlook, risks and other items
Management described 2017 as challenging amid uncertainty around oil production and prices and low commodity prices. It noted potential support from infrastructure, military, pipeline and U.S. manufacturing initiatives, and expressed hope for recovering oil-and-gas capital spending. The company said it would manage expenses closely and remained positioned to pursue acquisitions and product development. No full-year revenue or earnings guidance was provided. Planned 2017 capital expenditures were $8–$10 million, expected to be funded internally.
The board declared a $0.115-per-share quarterly dividend payable June 9, 2017, and management said it expected to continue regular dividends, subject to board review and the company’s condition and outlook. The quarter’s pension settlement charge was an unusual non-cash item; it included $1.1 million in cost of products sold and $0.6 million in SG&A.
Disclosed risks include business and competitive conditions, raw-material availability, cybersecurity, acquisition integration, regulatory and environmental compliance, foreign-exchange exposure, foreign-market conditions, goodwill impairment, pension settlement expense and family ownership. Management reported no material changes to previously disclosed legal proceedings or risk factors, and said disclosure controls were effective at March 31, 2017. The company was assessing the impact of the forthcoming revenue-recognition standard and planned to use the modified retrospective transition method.
Important facts for investors to verify
- Whether sales and backlog stabilize, particularly in municipal, fire-protection, agriculture and petroleum markets, and how PCCP project runoff affects year-over-year comparisons.
- Whether reported margins and earnings recover after the pension settlement charge, and whether the charge or related pension costs recur.
- Whether receivables and working-capital movements support operating cash flow, and whether planned capital spending stays within the $8–$10 million range.
- Whether the $96.9 million backlog converts to revenue on expected timing and margins.
- How adoption of the revenue-recognition standard affects reported results and disclosures, and whether the dividend remains supported by cash generation.