The Gorman-Rupp Company — Q3 2012 Form 10-Q
Business and reporting period. Gorman-Rupp designs, manufactures, and markets pumps and related equipment. This unaudited filing covers the three and nine months ended September 30, 2012; comparisons are with the corresponding 2011 periods unless noted. Dollar amounts below are in millions except per-share figures.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $91.6 | $90.2 | $287.0 | $266.4 |
| Gross profit | $21.8 | $22.5 | $71.2 | $68.1 |
| Gross margin | 23.8% | 24.9% | 24.8% | 25.6% |
| Operating income | $10.1 | $11.5 | $36.8 | $35.7 |
| Net income | $6.7 | $7.7 | $24.5 | $23.7 |
| EPS | $0.32 | $0.37 | $1.17 | $1.13 |
- Q3 sales grew 1.6%, but net income fell 12.4% and EPS declined 13.5%. The company attributed weaker earnings mainly to less favorable product mix and higher SG&A, including healthcare costs and Pumptron acquisition-related expenses. Gross margin fell 1.1 percentage points.
- Nine-month sales reached a record, up 7.7%; net income rose 3.4% and EPS 3.5%. Gross margin declined 0.8 percentage points despite higher sales. The effective tax rate was 33.9% versus 32.8% for the nine-month periods.
- Q3 sales increased 10.3% in water markets and decreased 12.0% in non-water markets. Domestic flood control, water supply, sewage, and international fire-protection shipments supported sales; OEM and construction weakness weighed on results. For nine months, agriculture, fire protection, petroleum, and industrial markets contributed to growth.
- For the first nine months, operating cash flow was $20.7 million versus $18.3 million; capital additions were $14.2 million, and the Pumptron acquisition used $4.8 million. Cash and cash equivalents decreased $5.4 million to $14.8 million from year-end 2011.
Financial position and liquidity
- At September 30, 2012, cash and short-term investments totaled $15.0 million; short-term debt was $8.0 million. The company reported $24.3 million available under bank lines after $5.7 million of letters of credit. It was in compliance with its restrictive covenants.
- Current assets were $162.6 million and current liabilities $49.0 million; the current ratio was 3.3 to 1. Working capital was $113.7 million, up 8.3% from December 31, 2011.
- Inventory was $81.8 million, up from $73.2 million at year-end. Days in inventory rose to 164 from 152 a year earlier; days sales in receivables were 56 versus 55.
- For the nine-month period, investing cash outflow increased to $18.2 million from $8.0 million, chiefly reflecting capital spending and the acquisition. Financing cash outflow was $8.1 million, including $6.1 million in dividends and $2.0 million of debt repayment.
Outlook, risks, and notable items
- Management cited uncertain domestic and global economic conditions as near-term headwinds, while identifying water and wastewater infrastructure, industrial and agricultural demand, international expansion, new products, and acquisitions as longer-term growth opportunities. It expects generally comparable operating margins over the long term; no specific earnings or revenue guidance was provided.
- Full-year 2012 capital expenditures were estimated at $15 million to $18 million, expected to be funded by internally generated cash and existing credit lines. Management said it expected to continue regular quarterly dividends, subject to board review and declaration.
- Backlog was $146.7 million, down from $157.9 million a year earlier and $155.5 million at year-end 2011. A prospective New Orleans flood-control project could add approximately $70 million to backlog in Q1 2013, but the award was protested and expected to be resolved by the end of January 2013.
- After the quarter, the pension-plan administrator confirmed a lump-sum distribution threshold had been exceeded. Management estimated a $2.1 million pension settlement loss, or approximately $0.10–$0.12 per share after tax, to be recorded in Q4 2012.
- Pumptron, a South African distributor and provider of pumping solutions, was acquired on September 1, 2012 for cash from internal funds. Purchase-price allocation remained preliminary; Pumptron had approximately $10 million of fiscal 2012 revenue, including Gorman-Rupp products.
- Management noted that new EPA engine-emissions requirements add and are expected to continue adding costs to engine-driven pump products. The filing reported no material changes to previously disclosed legal proceedings or risk factors and stated that disclosure controls were effective.
Important facts for investors to verify
- Whether the protested New Orleans project is awarded and whether the anticipated approximately $70 million backlog addition materializes.
- The final Pumptron purchase-price allocation and its contribution to revenue, costs, and earnings.
- The timing and final amount of the estimated Q4 pension settlement loss.
- Whether inventory growth, margin pressure, and higher healthcare and regulatory-related costs persist.
- Whether 2012 capital spending remains within the $15 million–$18 million estimate and liquidity and covenant compliance are maintained.