The Gorman-Rupp Company — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012. The company designs and manufactures pumps and related equipment for water, wastewater, construction, industrial, agricultural, energy and other markets. Financial figures below are in U.S. dollars; dollar amounts are rounded to millions unless stated otherwise.
Financial performance
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net sales | $102.8 million | $84.1 million | +22.3% |
| Gross profit / gross margin | $26.7 million / 25.9% | $21.4 million / 25.4% | Profit +24.7% |
| Operating income | $15.2 million | $10.7 million | +42.9% |
| Net income | $10.2 million | $7.1 million | +43.9% |
| Earnings per share | $0.49 | $0.34 | +44.1% |
| Operating cash flow | $6.2 million | $5.4 million | +$0.8 million |
SG&A was $11.4 million, up 6.7%, and declined to 11.1% of sales from 12.8%. The effective tax rate was 33.4%, compared with 33.0%. Comprehensive income was $10.2 million, versus $7.9 million.
Liquidity, debt and cash flow
- At March 31, cash and cash equivalents were $20.4 million, short-term investments were $0.9 million, and short-term bank debt was $10.0 million.
- Current assets were $167.1 million and current liabilities were $55.9 million; the current ratio was 3.0 to 1. Working capital was a record $111.2 million, up 5.9% from year-end, primarily as receivables rose with sales.
- Investing activities used $4.4 million, including $4.5 million of capital additions. Financing activities used $1.9 million, consisting of dividends. Cash increased $0.2 million during the quarter.
- The company reported $25.0 million available under bank lines after $5.0 million of letters of credit, and said it complied with its restrictive covenants. It expected to repay the $10.0 million of bank debt during 2012.
Material changes and operating trends
- Sales rose across most major markets. Construction increased $4.7 million, industrial $4.5 million, OEM $2.9 million and agriculture $2.6 million. Municipal sales were flat, partly due to lower domestic flood-control project sales.
- International sales rose 17.5% and represented 31.0% of total sales.
- Gross margin improved by 0.5 percentage points. Management attributed lower warranty expense, down $381,000, to improved claims and processing experience; earnings also benefited from operating leverage on record sales.
- Backlog was $139.1 million at quarter-end, down 1.4% year over year and 10.5% from December 31, 2011. The company cited record shipments, less intense natural-gas-drilling demand and lower municipal orders.
Outlook, risks and other disclosures
Management described opportunities in water and wastewater infrastructure, industrial and agricultural demand, international markets and new products, and said it expects long-term organic growth at generally comparable operating margins. Estimated 2012 capital expenditures were $14 million to $17 million, principally for machinery and equipment, to be funded through internal cash generation and existing credit lines. The company expected to continue regular quarterly dividends, subject to board review and discretion; no specific earnings or sales guidance was provided.
Management noted that new EPA engine-emission standards add, and are expected to continue adding, costs to engine-driven pump products. Forward-looking results are subject to economic conditions, competition, product development and introductions, regulatory and tax changes, emerging-market conditions, and acquisition opportunities. The filing reported no material changes to previously disclosed legal proceedings or risk factors, and no material market risk from foreign operations. Disclosure controls were deemed effective as of March 31, 2012.
The company cautioned that first-quarter results are not necessarily indicative of full-year results. Interim LIFO inventory valuations are estimates subject to year-end adjustment. The filing also reflects the 5-for-4 stock split distributed in June 2011.
Important facts for investors to verify
- Whether the lower backlog and municipal orders persist, and how shipments compare with incoming orders.
- Whether growth in construction, industrial, OEM and agricultural markets continues, particularly given changing natural-gas-drilling demand.
- Whether the company repays its $10.0 million bank debt during 2012 and achieves its $14 million to $17 million capital-spending estimate.
- Whether EPA-related engine costs, working-capital needs and year-end LIFO valuation affect margins or cash generation.
- Whether management’s long-term growth expectations and dividend plans remain consistent with subsequent results and board decisions.