Gorman-Rupp Reports Third Quarter 2018 Financial Results

Net sales for the third quarter of 2018 were $102.9 million compared to $94.0 million for the third quarter of 2017, an increase of 9.5% or $8.9 million. Domestic sales increased 11.0% or $6.5 million and international sales increased 7.0% or $2.4 million compared to the same period in 2017.

Sales in our water markets increased 12.4% or $7.9 million in the third quarter of 2018 compared to the third quarter of 2017. Sales in the fire protection market increased $3.7 million driven primarily by international sales. Sales in the municipal market increased $2.2 million due primarily to positive municipal economic sentiment. In addition, sales in the construction market increased $1.1 million, sales of repair parts increased $0.7 million and sales in the agriculture market increased $0.2 million.

Sales increased 3.4% or $1.0 million in our non-water markets during the third quarter of 2018 compared to the third quarter of 2017. Sales in the petroleum and industrial markets increased a combined $1.4 million due principally to increased capital spending related to oil and gas drilling activity. These increases were partially offset by decreased sales in the OEM market of $0.4 million.

International sales were $37.6 million in the third quarter of 2018 compared to $35.2 million in the same period last year and represented 37% of total sales for the Company in both periods. International sales increased most notably in the fire protection, petroleum and construction markets and decreased in the industrial and OEM markets.

Gross profit was $27.3 million for the third quarter of 2018, resulting in gross margin of 26.6%, compared to gross profit of $26.5 million and gross margin of 28.2% for the same period in 2017. The 160 basis points decrease in gross margin was largely driven by an unfavorable LIFO impact of 140 basis points. The remaining 20 basis points decrease in gross margin was due primarily to an increase in material costs as a result of inflationary pressures and tariffs, partially offset by lower overhead costs as a percent of sales due to leverage from increased sales volume.

Selling, general and administrative expenses (“SG&A”) was $14.2 million and 13.8% of net sales for the third quarter of 2018 compared to $14.1 million and 15.0% of net sales for the same period in 2017. SG&A as a percentage of sales improved 120 basis points primarily as a result of leverage from increased sales volume.

Operating income was $13.1 million, resulting in operating margin of 12.8% for the third quarter of 2018, compared to operating income of $8.2 million and operating margin of 8.8% for the same period in 2017. The third quarter of 2017 included non-cash impairment charges of $4.1 million or 440 basis points due to decreased demand for barge pumps in the marine transportation market. Excluding the impairment charges, operating margin decreased 40 basis points due principally to an unfavorable LIFO impact.

The Company’s effective tax rate decreased to 21.6% for the third quarter of 2018 from 28.3% for the third quarter of 2017, due primarily to the impact of the U.S. Tax Cuts and Jobs Act (“Tax Act”) enacted in December 2017.

Net income was $10.7 million for the third quarter of 2018 compared to $5.7 million in the third quarter of 2017, and earnings per share were $0.41 and $0.22 for the respective periods. Earnings per share for the third quarter of 2018 included an unfavorable LIFO impact of $0.04 per share. Earnings per share for the third quarter of 2017 included non-cash impairment charges of $0.10 per share and a non-cash pension settlement charge of $0.01 per share.

Net sales for the first nine months of 2018 were $311.3 million compared to $284.5 million for the first nine months of 2017, an increase of 9.4% or $26.9 million. Domestic sales increased 10.9% or $19.8 million and international sales increased 6.9% or $7.1 million compared to the same period in 2017.

Sales in our water markets increased 10.8% or $21.0 million in the first nine months of 2018 compared to the first nine months of 2017. Sales in the fire protection market increased $8.3 million due primarily to improved economic conditions domestically and sales in the construction market increased $5.2 million due primarily to increased oil and gas drilling activity. Sales of repair parts increased $3.4 million driven by the overall increase in sales volume and sales in the municipal market increased $3.2 million due primarily to positive municipal economic sentiment. In addition, sales in the agriculture market increased $0.9 million.

Sales increased 6.5% or $5.9 million in our non-water markets during the first nine months of 2018 compared to the first nine months of 2017. Sales in the industrial and petroleum markets increased a combined $6.7 million due principally to increased capital spending related to oil and gas drilling activity. These increases were partially offset by decreased sales in the OEM market of $0.8 million.

International sales were $110.1 million in the first nine months of 2018 compared to $103.0 million in the same period last year and represented 35% and 36% of total sales for the Company in each of the two periods, respectively. International sales increased most notably in the fire protection, petroleum and repair parts markets and decreased in the OEM and agriculture markets.

Gross profit was $83.4 million for the first nine months of 2018, resulting in gross margin of 26.8%, compared to gross profit of $76.0 million and gross margin of 26.7% for the same period in 2017. The 10 basis points increase in gross margin was largely driven by leverage from increased sales volume partially offset by an increase in material costs primarily as a result of inflationary pressures and tariffs.

SG&A was $43.4 million and 14.0% of net sales for the first nine months of 2018 compared to $41.8 million and 14.7% of net sales for the same period in 2017. SG&A as a percentage of sales improved 70 basis points as a result of leverage from increased sales volume.

Operating income was $40.0 million, resulting in operating margin of 12.8% for the first nine months of 2018, compared to operating income of $30.1 million and operating margin of 10.6% for the same period in 2017. The first nine months of 2017 included non-cash impairment charges in the third quarter of $4.1 million or 140 basis points. Excluding the impairment charges, operating margin improved 80 basis points due principally to leverage from increased sales volume.

The Company’s effective tax rate decreased to 21.6% for the first nine months of 2018 from 31.3% for the first nine months of 2017, due primarily to the impact of the Tax Act enacted in December 2017. Excluding discrete impacts of pension plan contributions and transition tax adjustments, the effective tax rate for the first nine months of 2018 would have been 23.2%.

Net income was $30.5 million for the first nine months of 2018 compared to $18.6 million in the first nine months of 2017, and earnings per share were $1.17 and $0.71 for the respective periods. The first nine months of 2018 earnings were reduced by non-cash pension settlement charges of $0.08 per share. The first nine months of 2017 earnings were reduced by non-cash impairment charges of $0.10 per share and non-cash pension settlement charges of $0.10 per share.

The Company’s backlog of orders was $122.4 million at September 30, 2018 compared to $111.4 million at September 30, 2017 and $114.0 million at December 31, 2017. The backlog at September 30, 2018 increased 9.9% as compared to September 30, 2017 driven by increased incoming orders in most of the markets the Company serves, most notably in the municipal, industrial and construction markets.

Capital expenditures for the first nine months of 2018 were $7.6 million and consisted primarily of machinery and equipment. Capital expenditures for the full-year 2018 are presently planned to be in the range of $10-$12 million.

The Company’s current estimate of its full year effective tax rate is between 22% and 24%.

Jeffrey S. Gorman, President and CEO commented, “In the third quarter the Company achieved strong sales growth and earnings compared to last year while leveraging overhead and SG&A expenses. As material costs have continued to rise, we remain focused on profitability and have begun to implement price increases to offset higher costs. Our backlog remains strong and we are confident that our solid balance sheet will enable us to continue to drive long-term shareholder value.”