Gorman-Rupp Company — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; unaudited. Comparisons are with Q1 2012 unless otherwise noted. Gorman-Rupp designs and manufactures pumps and pump systems for water, wastewater, construction, industrial, agricultural, and other markets.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $92.5 million | $102.8 million | Down 10.1% |
| Gross margin | 23.0% | 25.9% | Down 2.9 percentage points |
| Operating income / margin | $8.3 million / 8.9% | $15.2 million / 14.8% | Lower |
| Income before taxes | $8.2 million | $15.4 million | Down 46.5% |
| Net income | $5.8 million | $10.2 million | Down 43.2% |
| Diluted earnings per share | $0.28 | $0.49 | Down $0.21 |
| Operating cash flow | $3.7 million | $6.2 million | Lower |
Reported gross and operating margins include a $1.4 million non-cash pension settlement charge. Excluding that charge, management reported gross margins of 23.9% versus 25.9%, operating margins of 10.4% versus 14.8%, and EPS of $0.32 versus $0.49. The effective tax rate was 29.3%, compared with 33.4%; the difference principally reflected reinstatement of the federal R&D tax credit in January 2013.
Balance sheet and liquidity
- At March 31, cash and cash equivalents were $16.5 million and short-term investments were $0.25 million. Short-term bank debt was $19.0 million, down from $22.0 million at year-end 2012.
- Working capital was $115.7 million; the current ratio was 2.9 to 1, compared with 2.7 to 1 at December 31, 2012. Total current assets were $177.1 million and current liabilities were $61.4 million.
- Net cash used in investing was $2.3 million, principally capital expenditures. Net cash used in financing was $5.1 million, including $3.0 million of debt repayment and $2.1 million of dividends.
- The company reported $24.1 million available under bank lines after $5.9 million of letters of credit and said it was in compliance with its restrictive covenants. Total liabilities were $95.6 million and shareholders’ equity was $238.8 million.
Material changes, outlook, and risks
- Domestic sales fell 21.0% while international sales rose 14.2%. Lower domestic construction-rental demand, reduced OEM shipments of power-generation-related products, and weaker oil and gas drilling demand drove much of the decline. International fire-protection and domestic agricultural sales partly offset the weakness.
- Management attributed margin pressure to the prior-year favorable product mix and record sales, lower current-period volume, the pension settlement charge, acquisition-related SG&A, and increased healthcare costs and depreciation. It expects the pension settlement charge may continue to affect results during 2013 as retirements occur.
- Backlog was $145.4 million at March 31, versus $139.1 million a year earlier and $143.4 million at year-end. Management said the increase reflected agricultural-season orders and OEM power-generation orders.
- A letter of intent for Patterson Pump to supply major flood-control pumps for a New Orleans project could add approximately $65 million to backlog in Q2. The Army Corps of Engineers reaffirmed the award on April 17, but another 10-day protest period was allowed. The proposed project would run three years and be the company’s largest single order if finalized.
- Management estimated 2013 capital expenditures of $10–12 million, expected to be funded by internally generated cash and existing credit lines. It expressed a long-term expectation of organic growth at generally comparable operating margins; the filing provides no specific full-year revenue or earnings guidance.
- Forward-looking risks cited include business and economic conditions, government budgets and changes in laws or taxes, protests concerning the New Orleans project, acquisition integration, and future cash flow and financial condition. Management reported no material changes to previously disclosed risk factors or legal proceedings.
Important facts for investors to verify
- Whether the New Orleans project award survives any further protest and becomes a binding contract.
- Whether backlog converts to shipments and revenue, particularly in construction, OEM, industrial, and agricultural markets.
- The continued impact and timing of pension settlement charges, as well as pension contributions and retirement activity.
- Whether operating cash generation supports planned capital spending, dividends, and debt management.
- How acquisition-related costs and integration affect SG&A and operating margins.