Gorman-Rupp Company — Q2 2011 Form 10-Q
Business and period: The Gorman-Rupp Company designs, manufactures and markets pumps and related equipment for water, wastewater, industrial, agricultural, construction and other liquid-handling applications. This unaudited filing covers the three and six months ended June 30, 2011, compared with the same 2010 periods. Per-share and share data reflect a five-for-four stock split effective June 10, 2011.
Financial performance
Amounts below are in millions of dollars except per-share data; percentages are calculated from reported figures.
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Net sales | $92.2 | $72.4 | $176.2 | $138.2 |
| Gross profit / margin | $24.2 / 26.3% | $17.3 / 23.9% | $45.6 / 25.9% | $32.7 / 23.7% |
| Operating income / margin | $13.5 / 14.6% | $8.9 / 12.3% | $24.1 / 13.7% | $15.6 / 11.3% |
| Net income / margin | $8.9 / 9.7% | $5.7 / 7.8% | $16.0 / 9.1% | $10.2 / 7.4% |
| EPS | $0.42 | $0.27 | $0.76 | $0.49 |
Cash flow: First-half operating cash flow was $7.3 million, down from $16.5 million a year earlier. Increased inventory was the principal reason for the decline; receivables also used cash. Investing cash flow was negative $5.7 million, including $5.9 million of net capital additions. Financing cash flow was negative $8.7 million, reflecting $5.0 million of debt repayment and $3.7 million in dividends. Cash and cash equivalents ended June at $25.7 million, versus $32.2 million at year-end 2010.
Liquidity and debt: Cash and short-term investments totaled $27.5 million. Short-term bank debt was $20.0 million, down from $25.0 million at December 31, 2010. The company reported $25.5 million available under bank lines after $4.5 million of letters of credit. Its current ratio was 2.5:1, compared with 2.4:1 at year-end, and it was in compliance with restrictive covenants. Total long-term debt is not separately reported in the presented balance sheet.
Changes and operating drivers
- Q2 sales increased 27.3% and first-half sales increased 27.6% year over year. Management attributed the improvement principally to stronger North American sales and the inclusion of National Pump Company, acquired October 1, 2010.
- Q2 growth included industrial, agricultural, construction and rental markets, as well as custom pumps for flood-control projects; fire-protection sales declined. In the first half, original-equipment sales also declined.
- Net income rose 57.8% in Q2 and 58.0% in the first half. Management cited improved operating leverage alongside higher sales. Cost of products sold grew more slowly than sales, and reported cost-of-sales ratios declined.
- Backlog reached a record $154.2 million at June 30, up 46.9% from a year earlier and 43.6% from December 31, 2010, reflecting stronger incoming orders.
- Inventory increased to $65.0 million from $51.4 million at year-end, contributing to weaker operating cash generation.
Outlook, risks and other items
- Management estimated full-year 2011 capital expenditures of $10–$12 million, expected to be funded by internally generated cash and existing credit lines. Management believed cash, operating cash generation and financing capacity would cover requirements, including capital expenditures and quarterly dividends, for the next 12 months. No specific revenue or earnings guidance was provided.
- The company paid a $0.09-per-share quarterly dividend in June, its 245th consecutive quarterly dividend. Future dividends remain subject to board discretion and the company’s financial condition and outlook.
- Forward-looking risks cited include business and spending conditions, competition, successful new-product development, regulatory and tax stability, emerging-market conditions and access to suitable acquisition opportunities. Management stated there were no material changes to previously reported risk factors or legal proceedings.
- The filing notes that interim results are not necessarily indicative of full-year results. Warranty liability was $1.4 million at June 30. The interim LIFO inventory estimate is subject to year-end valuation.
- Disclosure controls and procedures were assessed as effective at June 30, 2011; no material changes in internal control over financial reporting were reported.
Important facts for investors to verify
- Whether the record backlog converts into shipments and revenue, and how much depends on flood-control projects or other concentrated demand.
- Whether inventory and receivables growth moderates and operating cash flow improves as sales expand.
- The sustainability of improved margins amid material-cost inflation, higher labor and overtime costs, and LIFO expense.
- National Pump’s ongoing contribution, integration costs and impact on future comparisons.
- Capital-spending execution, debt and credit-line availability, covenant compliance, and the board’s future dividend decisions.