Gorman-Rupp Company — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. The company designs and manufactures pumps and related equipment for water, wastewater, industrial, agricultural, construction, fire protection, and other markets. Financial amounts below are in U.S. dollars; statement amounts reported in thousands are shown as millions where indicated.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $92.6m | $92.2m | $195.4m | $176.2m |
| Gross profit | $22.7m | $24.2m | $49.4m | $45.6m |
| Gross margin | 24.6% | 26.3% | 25.3% | 25.9% |
| Operating income | $11.5m | $13.5m | $26.7m | $24.1m |
| Net income | $7.6m | $8.9m | $17.8m | $16.0m |
| Diluted earnings per share | $0.36 | $0.42 | $0.85 | $0.76 |
- Q2 net sales were up 0.5%, but net income fell 15.2% and EPS fell 14.3%. The filing attributes the earnings decline mainly to less favorable product mix and higher healthcare expense.
- First-half sales rose 10.9% and net income increased 11.0%. First-half net margin was 9.1%, unchanged from 2011; operating income grew 10.7%.
- Cash provided by operations was $12.0m in the first half, versus $7.3m in 2011. Capital additions were $11.0m, compared with $5.9m; dividends paid were $4.0m.
- At June 30, cash and short-term investments totaled $17.1m; short-term bank debt was $9.0m. The company reported $24.0m available on bank lines after $6.0m of letters of credit. Current assets were $171.2m and current liabilities $60.1m; the current ratio was 2.9:1.
- Working capital was $111.1m, up 5.8% from year-end 2011. Inventory increased to $85.4m from $73.2m, while days in inventory rose to 168 from 153 a year earlier.
Changes, outlook, and risks
- Q2 market performance was mixed: fire protection sales increased $6.1m and agriculture $1.7m, while municipal sales declined $7.0m and construction sales declined $2.0m. International sales rose 38.0% year over year; domestic sales declined 15.8%.
- First-half growth was led by fire protection, agriculture, industrial, and OEM markets. Municipal sales remained a drag, particularly due to fewer flood-control pump shipments and funding constraints.
- Backlog was $133.7m at June 30, down from $154.2m a year earlier and $155.5m at year-end 2011. Management cited record first-half shipments and lower incoming construction and municipal orders.
- Management expects full-year capital expenditures of $14m–$17m, principally for machinery and equipment, funded through internally generated funds and existing credit lines. The $9m debt balance was expected to be repaid within 12 months. No specific revenue or earnings guidance was provided.
- The company expects to continue regular quarterly dividends, subject to Board review and discretion. Management sees long-term growth opportunities in water and wastewater infrastructure, international markets, industrial applications, agriculture, and new products.
- EPA engine-emissions requirements add costs to applicable engine-driven pump products. Other cited uncertainties include economic conditions, competition, product development, taxes and regulation, emerging-market conditions, and acquisition opportunities. The filing reports no material changes in previously disclosed legal proceedings or risk factors and states that disclosure controls were effective.
Important facts for investors to verify
- Whether lower municipal and construction orders persist and how the reduced backlog converts into future sales.
- Whether product mix and healthcare costs continue to pressure gross margins and earnings.
- Inventory growth and the increase in days in inventory relative to sales and backlog.
- Execution and funding of the planned $14m–$17m capital program, expected debt repayment, and availability of credit lines.
- Impact of EPA emissions-related costs and the potential effect of the unextended research and development tax credit on the effective tax rate.