Business context and reporting period
The Gorman-Rupp Company designs, manufactures, and markets pumps and related equipment for water, wastewater, industrial, agricultural, construction, municipal, and other applications. This unaudited Form 10-Q covers the three and nine months ended September 30, 2011, compared with the corresponding 2010 periods. Results include National Pump Company, acquired October 1, 2010. Per-share and share-count data reflect the five-for-four stock split effective June 10, 2011.
Financial results
Amounts below are in millions of dollars, except per-share amounts and percentages.
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $90.2 | $74.0 | $266.4 | $212.1 |
| Gross profit | $22.5 | $18.7 | $68.1 | $51.4 |
| Operating income | $11.5 | $9.3 | $35.7 | $24.9 |
| Income before taxes | $11.2 | $9.3 | $35.2 | $24.5 |
| Net income | $7.7 | $6.2 | $23.7 | $16.3 |
| EPS | $0.37 | $0.29 | $1.13 | $0.78 |
- Q3 sales grew 22.0%, net income 24.4%, and EPS 27.6%. Nine-month sales grew 25.6%, net income 45.3%, and EPS 44.9%.
- Gross margin was approximately 24.9% in Q3 versus 25.2% a year earlier; for nine months it was approximately 25.6% versus 24.2%. Operating margin was approximately 12.8% versus 12.5% in Q3 and 13.4% versus 11.7% year to date. Nine-month net margin rose to 8.9% from 7.7%; Q3 net margin was 8.5% versus 8.3%.
- Cash from operations for nine months was $18.3 million, compared with $22.6 million in 2010. Investing used $8.0 million and financing used $15.6 million. Cash and cash equivalents declined $5.9 million to $26.3 million.
- At September 30, cash and short-term investments totaled $27.8 million; short-term debt was $15.0 million, down from $25.0 million at year-end 2010. The company reported $25.3 million available under bank lines after letters of credit. Current assets were $159.0 million and current liabilities $60.7 million; the current ratio was 2.6 to 1.
- Dividends paid were $0.090 per share in Q3 and $0.264 per share for nine months. Capital expenditures were $8.5 million for nine months.
Material changes and management commentary
- Management attributed growth primarily to North American sales and improved operating leverage, with additional sales and earnings contribution from National Pump. Q3 growth was strongest in industrial, agriculture, and construction; fire-protection sales declined. For nine months, industrial, agriculture, construction, and municipal sales increased, partly offset by lower fire-protection and government/original-equipment sales.
- Backlog reached a record $157.9 million at September 30, up 50.9% from a year earlier and 47.0% from $107.4 million at December 31, 2010. Management noted that flood-control projects generally have longer lead times.
- Nine-month operating cash flow was lower chiefly because of higher inventories. Inventory rose to $72.0 million from $51.4 million at year-end. Higher sales also increased material, labor, and other production costs; nine-month cost of sales benefited from improved leverage as a percentage of revenue.
Outlook, risks, and unusual items
- Management estimated 2011 capital expenditures of $10 million to $12 million, principally for machinery and equipment, funded through internally generated cash and existing credit lines. It believed available cash, operating cash flow, and financing capacity would meet requirements, including capital spending and quarterly dividends, over the next 12 months. Future dividends remain subject to board discretion.
- In October 2011, the pension plan administrator confirmed that the threshold for lump-sum retiree distributions had been exceeded. The company estimated a required fourth-quarter pension settlement loss of $3 million, or approximately $0.09 to $0.10 per share.
- Forward-looking risks cited include business and spending conditions, competition, new-product development, changes in laws and taxes, conditions in emerging economies, and acquisition opportunities and regulatory requirements. The filing reported no material changes to previously disclosed risk factors or legal proceedings, and no material market-risk exposure.
- The company reported compliance with bank covenants. Management stated that disclosure controls were effective as of September 30, 2011, with no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the record backlog, including longer-lead-time municipal flood-control orders, converts to sales on expected schedules and margins.
- Whether inventory growth moderates and operating cash flow improves as demand is fulfilled.
- The final amount and fourth-quarter earnings effect of the estimated pension settlement loss.
- National Pump’s contribution to reported growth and the sustainability of improvements in margins and operating leverage.
- Actual 2011 capital spending, credit-line availability, and the company’s ability to maintain dividends while funding operations.