The Gorman-Rupp Company — Q2 2013 Form 10-Q
Business and period: The company designs, manufactures and markets pumps and pump systems for water, wastewater, industrial, agricultural and other applications. This unaudited filing covers the three and six months ended June 30, 2013; balance-sheet comparisons are with December 31, 2012.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $106.4 million | $92.6 million | $198.9 million | $195.4 million |
| Gross margin | 24.9% | 24.6% | 24.0% | 25.3% |
| Operating income | $13.5 million | $11.5 million | $21.8 million | $26.7 million |
| Operating margin | 12.7% | 12.4% | 10.9% | 13.7% |
| Net income | $9.2 million | $7.6 million | $15.0 million | $17.8 million |
| Diluted earnings per share | $0.43 | $0.36 | $0.71 | $0.85 |
Q2 sales rose 14.9%, and net income rose 21.1%. For the first half, sales increased 1.8%, while net income declined 15.9%. Management reported adjusted Q2 gross margin of 25.9%, operating margin of 14.2% and EPS of $0.48, excluding non-cash pension settlement charges. First-half adjusted gross margin was 25.0%, operating margin 12.5% and EPS $0.80. These are non-GAAP measures; the filing explains that management uses them to assess results excluding the charges.
Cash flow, liquidity and balance sheet
- First-half operating cash flow was $21.1 million, versus $12.0 million in 2012. Investing cash outflow was $3.4 million, versus $10.8 million; financing cash outflow was $11.2 million, versus $5.0 million.
- Cash and cash equivalents were $26.9 million at June 30, 2013; short-term investments were $0.3 million. Short-term bank debt was $15.0 million, down from $22.0 million at year-end. The filing reports no long-term debt balance.
- Available bank lines were $24.5 million after $5.5 million of outstanding letters of credit. The company reported compliance with its restrictive covenants.
- Working capital was $123.1 million, up 11.1% from year-end; the current ratio was 2.9 to 1, compared with 2.7 to 1 at December 31, 2012. Cash increased $6.7 million during the first half.
- Capital expenditures were $3.4 million in the first half. The company estimated full-year 2013 capital expenditures of $17–19 million, expected to be financed with internally generated funds and existing credit lines.
Material changes and management commentary
- Q2 sales reached a quarterly record, driven chiefly by domestic shipments: domestic sales increased 28.4%, while international sales decreased 4.0%. Water-market growth included Gulf Coast flood-control and agriculture shipments; industrial and OEM shipments also contributed. For the first half, growth in water markets was partly offset by weaker construction-rental demand and lower OEM power-generation shipments.
- Backlog was $195.4 million at June 30, compared with $133.7 million a year earlier and $143.4 million at year-end. The increase included an approximately $60 million Permanent Canal Closure Project contract for New Orleans flood-control pumps. Shipments were expected to begin in late 2013 and continue through 2016, mostly in 2014 and 2015.
- First-half margins and earnings were pressured by a less favorable product mix versus 2012, higher SG&A (including expenses from two fourth-quarter 2012 acquisitions), and pension settlement charges. Healthcare and depreciation costs also increased.
- Management expects long-term growth opportunities from U.S. and international water and wastewater infrastructure needs and demand in industrial and agricultural applications. It said it expects to grow organically at generally comparable operating margins over the long term; the filing provides no specific revenue or earnings guidance.
Unusual items, risks and contingencies
- Continued lump-sum retirement payments triggered GAAP-required non-cash pension settlement charges of $1.6 million in Q2 and $3.0 million for the first half. Management expected further charges during the rest of 2013, likely in lesser amounts. The charges reduced reported margins and earnings.
- The federal research and development tax credit was reinstated and extended in January 2013, affecting the comparison of effective tax rates with 2012.
- Identified forward-looking risks include business conditions, government budgets and laws or taxes, successful integration of acquisitions, future pension settlement charges, possible delays or disruptions in the New Orleans flood-control project, and future cash flow and financial condition.
- The company reported no material changes to previously disclosed legal proceedings or risk factors, and no material market risks from foreign operations or diversified export sales. Disclosure controls were assessed as effective at June 30, 2013.
The board declared a quarterly dividend of $0.105 per share on July 25, 2013, payable September 10 to shareholders of record August 15. This was a 5% increase over the prior quarterly dividend.
Important facts for investors to verify
- Whether the approximately $60 million flood-control contract proceeds on schedule and converts into shipments and cash as expected.
- The scale and duration of additional pension settlement charges and their effect on reported and adjusted earnings.
- Whether backlog, particularly project-related orders, supports sales beyond 2013 without undue customer, timing or execution risk.
- How acquisition-related costs, product mix, healthcare costs and depreciation affect margins in subsequent periods.
- Whether planned capital spending remains within the $17–19 million estimate and is funded without materially weakening liquidity.
- That adjusted margins and EPS are non-GAAP measures; compare them with reported results and the filing’s reconciliation and explanation.