The Gorman-Rupp Company — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. The company manufactures pumps and pump systems serving water, wastewater, agricultural, industrial, OEM, and other markets. Financial statements are unaudited; amounts below are in millions except per-share data.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $101.2 | $91.6 | $300.1 | $287.0 |
| Gross profit | $24.5 | $21.8 | $72.2 | $71.2 |
| Gross margin | 24.2% | 23.8% | 24.1% | 24.8% |
| Operating income | $12.0 | $10.1 | $33.8 | $36.8 |
| Operating margin | 11.9% | 11.0% | 11.3% | 12.8% |
| Net income | $7.9 | $6.7 | $22.9 | $24.5 |
| Diluted earnings per share | $0.38 | $0.32 | $1.09 | $1.17 |
- Cash flow, nine months: Operating activities provided $37.7 million, versus $20.7 million a year earlier. Investing used $5.1 million, primarily for capital expenditures; financing used $19.3 million, including $13.0 million of debt repayment and $6.3 million of dividends.
- Balance sheet at September 30: Cash and short-term investments totaled $33.8 million; short-term bank debt was $9.0 million, down from $22.0 million at December 31, 2012. Working capital was a record $129.3 million, up 16.6% from year-end. The current ratio was 3.2:1, compared with 2.7:1 at year-end. The company reported $25.6 million of unused bank lines after letters of credit and compliance with its stated restrictive covenants.
- Other measures: Backlog was $190.7 million, compared with $146.7 million a year earlier and $143.4 million at year-end 2012. Nine-month dividends paid were $0.30 per share.
Changes and drivers
- Q3 sales rose 10.4% year over year, led by domestic sales, which increased 18.3%; international sales fell 3.3%. Higher agriculture and fire-protection shipments, OEM power-generation and military business, and industrial shipments contributed. Lower Gulf Coast flood-control shipments partly offset growth.
- Nine-month sales increased 4.5%. Growth in fire, agriculture, flood-control, and international petroleum markets was partly offset by weaker construction-market demand, particularly from pump rental businesses.
- Q3 net income increased 18.5%. For the first nine months, net income declined 6.5%, primarily reflecting lower operating income and pension settlement costs. Management said nine-month EPS would have been $1.20 excluding the after-tax pension settlement charge, versus reported EPS of $1.09.
- Nine-month gross margin declined 0.7 percentage point. Management attributed about 0.7 point to pension settlement charges and about 0.2 point to higher healthcare costs and depreciation. SG&A increased 11.5%, with acquisition-related expenses and pension charges cited as contributors.
Outlook, risks, and notable items
- Backlog and spending: The backlog includes an approximately $60 million Permanent Canal Closure Project contract for a New Orleans flood-control project; shipments are expected mainly in the second half of 2014 and first half of 2015. Management estimated 2013 net capital expenditures of $16–$17 million, with approximately $12 million expected in Q4, primarily for machinery and equipment.
- Management outlook: The company said it expects long-term organic growth at generally comparable operating margins, citing infrastructure rehabilitation and demand for pump systems in industrial and agricultural markets. The filing provides no specific earnings or revenue guidance.
- Pension charge: Continuing retiree lump-sum distributions triggered $3.5 million of non-cash pension settlement charges in the first nine months, including $0.49 million in Q3. Management noted that the required charges depend on an actuarial payment threshold; no comparable charge was required in the first nine months of 2012.
- Capital returns: On October 24, the board declared a five-for-four share split, distributable December 10 to shareholders of record November 15. It also declared a $0.09 quarterly dividend per post-split share, described as a 12.5% increase over the prior quarter’s equivalent post-split dividend.
- Risks and controls: Identified forward-looking risks include business conditions, government budgets and regulation, acquisition integration, future pension charges, delays or disruptions to 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, no material market-risk exposure, and effective disclosure controls as of September 30.
Important facts for investors to verify
- Whether the $60 million flood-control contract proceeds on schedule and converts into shipments and revenue in 2014–2015.
- How much additional pension settlement expense may arise from retiree lump-sum elections and the actuarial threshold.
- Whether gross and operating margins recover as the pension charges, acquisition costs, healthcare costs, and depreciation affect results.
- Whether the projected capital spending and continued dividends can be funded from operating cash flow while maintaining liquidity and covenant compliance.
- The extent to which sales growth depends on cyclical or project-based markets, including construction rentals, agriculture, fire protection, and flood control.