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GORMAN RUPP CO - Quarter Report: 2023 June (Form 10-Q)

grc20230630_10q.htm
 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2023

 

or          

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File Number 1-6747

 

The Gorman-Rupp Company

(Exact name of registrant as specified in its charter)

 

Ohio

 

34-0253990

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

   
     

600 South Airport Road, Mansfield, Ohio

 

44903

(Address of principal executive offices)

 

(Zip Code)

 

Registrants telephone number, including area code (419) 755-1011

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Shares, without par value

GRC

New York Stock Exchange

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes    ☒    No    ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes    ☒    No    ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ☐

Accelerated filer ☒

Non-accelerated filer ☐

Smaller reporting company ☐

Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes    ☐     No    ☒

 

On July 31, 2023 there were 26,193,998 common shares, without par value, of The Gorman-Rupp Company outstanding.

 

 

 

 

 

The Gorman-Rupp Company

Three and Six Months Ended June 30, 2023 and 2022

 

PART I. FINANCIAL INFORMATION

 

Item 1.

Financial Statements (Unaudited)

 
 

Consolidated Statements of Income

- Three months ended June 30, 2023 and 2022

- Six months ended June 30, 2023 and 2022

3

 

Consolidated Statements of Comprehensive Income

- Three months ended June 30, 2023 and 2022

- Six months ended June 30, 2023 and 2022

3

 

Consolidated Balance Sheets
- June 30, 2023 and December 31, 2022

4

 

Consolidated Statements of Cash Flows
- Six months ended June 30, 2023 and 2022

5

 

Consolidated Statements of Equity

- Six months ended June 30, 2023 and 2022

6

 

Notes to Consolidated Financial Statements (Unaudited)

7

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

14

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

22

Item 4.

Controls and Procedures

23

   

PART II. OTHER INFORMATION

 

Item 1.

Legal Proceedings

23

Item 1A.

Risk Factors

23

Item 2.         

Unregistered Sales of Equity Securities and Use of Proceeds

24

Item 3.

Defaults Upon Senior Securities

24

Item 4.

Mine Safety Information

24

Item 5.

Other Information

24

Item 6.

Exhibits

25

EX-31.1

Section 302 Principal Executive Officer (PEO) Certification

 

EX-31.2

Section 302 Principal Financial Officer (PFO) Certification

 

EX-32

Section 1350 Certifications

 

 

2

 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1.         FINANCIAL STATEMENTS (UNAUDITED)

 

 

THE GORMAN-RUPP COMPANY

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

   

Three Months Ended
June 30,

   

Six Months Ended
June 30,

 

(Dollars in thousands, except per share amounts)

 

2023

   

2022

   

2023

   

2022

 

Net sales

  $ 171,024     $ 119,067     $ 331,490     $ 221,234  

Cost of products sold

    119,366       90,828       234,309       167,498  

Gross profit

    51,658       28,239       97,181       53,736  

Selling, general and administrative expenses

    24,193       24,114       47,430       39,936  

Amortization expense

    3,182       1,218       6,373       1,435  

Operating income

    24,283       2,907       43,378       12,365  

Interest expense

    (10,485 )     (2,322 )     (20,672 )     (2,322 )

Other income (expense), net

    (536 )     (1,846 )     (969 )     (1,756 )

Income (loss) before income taxes

    13,262       (1,261 )     21,737       8,287  

Provision (benefit) from income taxes

    2,785       (265 )     4,740       1,740  

Net income (loss)

  $ 10,477     $ (996 )   $ 16,997     $ 6,547  

Earnings (loss) per share

  $ 0.40     $ (0.04 )   $ 0.65     $ 0.25  

Cash dividends per share

  $ 0.175     $ 0.170     $ 0.350     $ 0.340  

Average number of shares outstanding

    26,178,248       26,079,115       26,154,196       26,085,006  

 

See notes to consolidated financial statements (unaudited).

 

 

 

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

 

   

Three Months Ended
June 30,

   

Six Months Ended
June 30,

 

(Dollars in thousands)

 

2023

   

2022

   

2023

   

2022

 

Net income (loss)

  $ 10,477     $ (996 )   $ 16,997     $ 6,547  

Other comprehensive income (loss), net of tax:

                               

Cumulative translation adjustments

    23       (2,828 )     278       (2,864 )

Cash flow hedging activity

    2,626       -       1,094       -  

Pension and postretirement medical liability adjustments

    233       1,663       366       2,086  

Other comprehensive income (loss)

    2,882       (1,165 )     1,738       (778 )

Comprehensive income (loss)

  $ 13,359     $ (2,161 )   $ 18,735     $ 5,769  

 

See notes to consolidated financial statements (unaudited).

 

3

 

 

 

THE GORMAN-RUPP COMPANY

CONSOLIDATED BALANCE SHEETS

 

   

(unaudited)

         

(Dollars in thousands)

 

June 30,

2023

   

December 31,

2022

 

Assets

 
Current assets:                

Cash and cash equivalents

  $ 12,173     $ 6,783  

Accounts receivable, net

    101,875       93,059  

Inventories, net

    115,816       111,133  

Prepaid and other

    10,957       14,551  

Total current assets

    240,821       225,526  

Property, plant and equipment, net

    136,047       128,640  

Other assets

    26,133       11,579  

Other intangible assets, net

    242,989       249,361  

Goodwill

    257,660       257,724  

Total assets

  $ 903,650     $ 872,830  

Liabilities and equity

 
Current liabilities:                

Accounts payable

  $ 29,161     $ 24,697  

Payroll and employee related liabilities

    21,281       17,132  

Commissions payable

    10,352       10,116  

Deferred revenue and customer deposits

    9,097       6,740  

Current portion of long-term debt

    17,500       17,500  

Accrued expenses

    8,796       9,028  

Total current liabilities

    96,187       85,213  

Pension benefits

    10,368       9,352  

Postretirement benefits

    22,092       22,413  

Long-term debt, net of current portion

    411,405       419,327  

Other long-term liabilities

    22,239       5,331  

Total liabilities

    562,291       541,636  
Equity:                

Common shares, without par value:

               

Authorized - 35,000,000 shares;

               

Outstanding - 26,178,248 shares at June 30, 2023 and 26,094,865 shares at December 31, 2022 (after deducting treasury shares of 870,548 and 953,931, respectively), at stated capital amounts

    5,115       5,097  

Additional paid-in capital

    4,165       3,912  

Retained earnings

    354,815       346,659  

Accumulated other comprehensive (loss)

    (22,736 )     (24,474

)

Total equity

    341,359       331,194  

Total liabilities and equity

  $ 903,650     $ 872,830  

 

See notes to consolidated financial statements (unaudited).

 

4

 

 

 

THE GORMAN-RUPP COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

   

Six Months Ended
June 30,

 

(Dollars in thousands)

 

2023

   

2022

 
Cash flows from operating activities:                

Net income

  $ 16,997     $ 6,547  
Adjustments to reconcile net income to net cash provided by operating activities:                

Depreciation and amortization

    14,158       7,201  

LIFO expense

    4,440       6,004  

Pension expense

    1,617       3,357  

Stock based compensation

    1,606       1,413  

Amortization of debt issuance fees

    1,481       237  

Other

    30       -  
Changes in operating assets and liabilities:                

Accounts receivable, net

    (8,645 )     (11,713 )

Inventories, net

    (8,959 )     (10,687 )

Accounts payable

    4,435       938  

Commissions payable

    142       392  

Deferred revenue and customer deposits

    2,365       (1,269 )

Income taxes

    2,374       (1,045 )

Accrued expenses and other

    2,235       1,273  

Benefit obligations

    3,580       4,044  

Net cash provided by operating activities

    37,856       6,692  
Cash flows from investing activities:                

Capital additions

    (13,270 )     (8,445 )

Payment for acquisitions

    -       (526,301 )

Other

    367       208  

Net cash used for investing activities

    (12,903 )     (534,538 )
Cash flows from financing activities:                

Cash dividends

    (9,148 )     (8,869 )

Treasury share repurchases

    (1,029 )     (918 )

Proceeds from bank borrowings

    5,000       445,000  

Payments to banks for borrowings

    (13,750 )     -  

Debt issuance fees

    -       (15,165 )

Other

    (534 )     (65 )

Net cash provided by (used for) financing activities

    (19,461 )     419,983  

Effect of exchange rate changes on cash

    (102 )     (503 )

Net increase (decrease) in cash and cash equivalents

    5,390       (108,366 )
Cash and cash equivalents:                

Beginning of period

    6,783       125,194  

End of period

  $ 12,173     $ 16,828  

 

See notes to consolidated financial statements (unaudited).

 

5

 

 

 

THE GORMAN-RUPP COMPANY

CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)

 

   

Six Months Ended June 30, 2023

 

(Dollars in thousands, except

 

Common Shares

   

Additional

Paid-In

   

Retained

   

Accumulated

Other

Comprehensive

         

share and per share amounts)

 

Shares

    Dollars     Capital     Earnings     (Loss) Income    

Total

 

Balances December 31, 2022

    26,094,865     $ 5,097     $ 3,912     $ 346,659     $ (24,474 )   $ 331,194  

Net income

                            6,520               6,520  

Other comprehensive loss

                                    (1,144 )     (1,144 )

Stock based compensation, net

    119,488       26       1       438               465  

Treasury share repurchases

    (36,105 )     (8 )     (889 )     (131 )             (1,028 )

Cash dividends - $0.175 per share

                            (4,567 )             (4,567 )

Balances March 31, 2023

    26,178,248     $ 5,115     $ 3,024     $ 348,919     $ (25,618 )   $ 331,440  

Net income

                            10,477               10,477  

Other comprehensive income

                                    2,882       2,882  

Stock based compensation, net

                    1,141                       1,141  

Treasury share repurchases

                                            -  

Cash dividends - $0.175 per share

                            (4,581 )             (4,581 )

Balances June 30, 2023

    26,178,248     $ 5,115     $ 4,165     $ 354,815     $ (22,736 )   $ 341,359  

 

 

 

   

Six Months Ended June 30, 2022

 

(Dollars in thousands, except

  Common Shares    

Additional

Paid-In

   

Retained

   

Accumulated

Other

Comprehensive

         

share and per share amounts)

 

Shares

    Dollars     Capital     Earnings     (Loss) Income    

Total

 

Balances December 31, 2021

    26,103,661     $ 5,099     $ 1,838     $ 353,369     $ (30,330 )   $ 329,976  

Net income

                            7,543               7,543  

Other comprehensive income

                                    387       387  

Stock based compensation, net

                    682                       682  

Treasury share repurchases

    (24,546 )     (5 )     (822 )     (91 )             (918 )

Cash dividends - $0.17 per share

                            (4,436 )             (4,436 )

Balances March 31, 2022

    26,079,115     $ 5,094     $ 1,698     $ 356,385     $ (29,943 )   $ 333,234  

Net income (loss)

                            (996 )             (996 )

Other comprehensive loss

                                    (1,165 )     (1,165 )

Stock based compensation, net

                    730                       730  

Treasury share repurchases

                                            0  

Cash dividends - $0.17 per share

                            (4,433 )             (4,433 )

Balances June 30, 2022

    26,079,115     $ 5,094     $ 2,428     $ 350,956     $ (31,108 )   $ 327,370  

 

See notes to consolidated financial statements (unaudited).

 

6

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

(Amounts in tables in thousands of dollars, except for per share amounts)

 

 

NOTE 1 - BASIS OF PRESENTATION OF FINANCIAL STATEMENTS

 

The accompanying unaudited Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The Consolidated Financial Statements include the accounts of The Gorman-Rupp Company (the “Company” or “Gorman-Rupp”) and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results. In the opinion of management of the Company, all adjustments considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2023 are not necessarily indicative of results that may be expected for the year ending December 31, 2023. For further information, refer to the Consolidated Financial Statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, from which related information herein has been derived.

 

 

NOTE 2 - ACQUISITIONS

 

On May 31, 2022, the Company acquired the assets of Fill-Rite and Sotera (“Fill-Rite”), a division of Tuthill Corporation, for cash consideration of $528.0 million. The transaction was funded with new debt consisting of $350.0 million from a senior secured term loan, $90.0 million from a subordinated unsecured loan, $5.0 million from the new revolving Credit Facility, and $83.0 million of cash on hand. Refer to “Note 10 – Financing Arrangements” for further details related to the financing completed as part of the transaction.

 

The Company accounted for the Fill-Rite transaction in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805 “Business Combinations”. The results of operations for Fill-Rite are included in the accompanying Consolidated Statements of Income from the acquisition date. Fill-Rite had $13.5 million in net sales and $0.2 million in operating income that was included in the Company’s consolidated financial statements for the three and six months ended June 30, 2022. Operating income included $1.4 million of inventory step up amortization and $0.2 million of acquired customer backlog amortization in addition to the $1.0 million in amortization on customer relationships and developed technology.

 

Under the acquisition method of accounting, the assets and liabilities have been recorded at their respective estimated fair values as of the date of completion of the acquisition and reported into the Company’s Consolidated Balance Sheets. The following table presents the fair value of assets acquired and liabilities assumed. No adjustments to the preliminary purchase price allocation were made during the second quarter of 2023 and the purchase price allocation is now final:

 

Account receivable

  $ 21,273  

Inventory

    12,214  

Customer backlog (amortized over 1 year)

    2,600  

Other current assets

    914  

Property, plant, and equipment

    24,505  

Customer relationships (amortized over 20 years)

    200,900  

Technology (amortized over 20 years)

    39,800  

Tradenames (unamortized)

    10,700  

Goodwill

    230,688  

Total assets acquired

  $ 543,594  

Current liabilities assumed

    (15,601 )

Allocated purchase price

  $ 527,993  

 

For tax purposes, the Fill-Rite acquisition was treated as an asset purchase. As such, the Company received a step-up in tax basis of the net Fill-Rite assets, equal to the purchase price, including goodwill which is deductible for tax purposes.

 

The transaction costs related to the acquisition approximated $6.9 million for the three and six months ended June 30, 2022. These costs were expensed as incurred and recorded within selling, general, and administrative expenses.

 

The following is supplemental pro-forma net sales, operating income, net income, and earnings per share had the Fill-Rite Acquisition occurred as of January 1, 2021 (in millions):

 

   

Six Months Ended

June 30, 2022

 

Net sales

  $ 286.3  

Operating income

  $ 27.7  

Net income

  $ 9.5  

Earnings per share

  $ 0.36  

 

The supplemental pro forma information presented above is being provided for information purposes only and may not necessarily reflect the future results of operations of the Company or what the results of operations would have been had the Company owned and operated Fill-Rite since January 1, 2021.

 

7

 

 

NOTE 3 REVENUE

 

Disaggregation of Revenue

 

The following tables disaggregate total net sales by end market and geographic location:

 

   

End market

 
   

Three Months Ended
June 30,

   

Six Months Ended
June 30,

 
   

2023

   

2022

   

2023

   

2022

 

Industrial

  $ 22,786     $ 18,664     $ 43,731     $ 36,518  

Fire

    36,935       27,904       73,074       56,326  

Agriculture

    5,027       5,195       9,776       10,207  

Construction

    11,921       10,073       22,949       19,238  

Municipal

    19,549       16,950       36,973       31,257  

Petroleum

    3,719       2,631       7,739       6,173  

OEM

    9,480       9,300       18,490       18,031  

Repair parts

    18,722       14,809       35,912       29,943  

Total net sales excluding Fill-Rite

    128,139       105,526       248,644       207,693  

Fill-Rite

    42,885       13,541       82,846       13,541  

Total net sales

  $ 171,024     $ 119,067     $ 331,490     $ 221,234  

 

 

    Geographic Location  
    Three Months Ended
June 30,
   

Six Months Ended
June 30,

 
    2023     2022    

2023

   

2022

 

United States

  $ 128,289     $ 85,375     $ 248,039     $ 157,766  

Foreign countries

    42,735       33,692       83,451       63,468  

Total net sales

  $ 171,024     $ 119,067     $ 331,490     $ 221,234  

 

International sales represented approximately 25% and 28% of total net sales for the second quarter of 2023 and 2022, respectively, and were made to customers in many different countries around the world.

 

On June 30, 2023, the Company had $249.8 million of remaining performance obligations, also referred to as backlog. The Company expects to recognize as revenue substantially all of its remaining performance obligations within one year.

 

The Company’s contract assets and liabilities as of June 30, 2023 and December 31, 2022 were as follows:

 

   

June 30,
2023

   

December 31,
2022

 

Contract assets

  $ -     $ -  

Contract liabilities

  $ 9,097     $ 6,740  

 

Revenue recognized for the six months ended June 30, 2023 and 2022 that was included in the contract liabilities balance at the beginning of the period was $3.7 million and $8.2 million, respectively.

 

 

NOTE 4 - INVENTORIES

 

LIFO inventories are stated at the lower of cost or market and all other inventories are stated at the lower of cost or net realizable value. Replacement cost approximates current cost and the excess over LIFO cost is approximately $92.6 million and $88.2 million at June 30, 2023 and December 31, 2022, respectively. Allowances for excess and obsolete inventory totaled $7.2 million at June 30, 2023 and December 31, 2022, respectively. An actual valuation of inventory under the LIFO method is made at the end of each year based on the inventory levels and costs at that time. Interim LIFO calculations are based on management’s estimate of expected year-end inventory levels and costs, and are subject to the final year-end LIFO inventory valuation.

 

8

 

Inventories are comprised of the following:

 

   

June 30,
2023

   

December 31,
2022

 

Inventories, net:

               

Raw materials and in-process

  $ 40,752     $ 40,448  

Finished parts

    61,536       57,224  

Finished products

    13,528       13,461  

Total net inventories

  $ 115,816     $ 111,133  

 

 

NOTE 5 PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment, net consist of the following:

 

   

June 30,
2023

   

December 31,
2022

 

Land

  $ 6,210     $ 6,215  

Buildings

    120,149       119,197  

Machinery and equipment

    224,510       212,581  
    $ 350,869     $ 337,993  

Less accumulated depreciation

    (214,822 )     (209,353

)

Property, plant and equipment, net

  $ 136,047     $ 128,640  

 

 

NOTE 6 - PRODUCT WARRANTIES

 

A liability is established for estimated future warranty and service claims based on historical claims experience and specific product failures. The Company expenses warranty costs directly to Cost of products sold. Changes in the Company’s product warranties liability are:

 

   

June 30,

 
   

2023

   

2022

 

Balance of beginning of year

  $ 1,973     $ 1,637  

Provision

    2,130       593  

Acquired

    -       645  

Claims

    (1,741 )     (665

)

Balance at end of period

  $ 2,362     $ 2,210  

 

 

NOTE 7 - PENSION AND OTHER POSTRETIREMENT BENEFITS

 

The Company sponsors a defined benefit pension plan (“GR Plan”) covering certain domestic employees. Benefits are based on each covered employee’s years of service and compensation. The GR Plan is funded in conformity with the funding requirements of applicable U.S. regulations. The GR Plan was closed to new participants effective January 1, 2008. Employees hired after this date, in eligible locations, participate in an enhanced 401(k) plan instead of the defined benefit pension plan. Employees hired prior to this date continue to accrue benefits.

 

The Company established a defined benefit pension plan for certain Fill-Rite employees (“Fill-Rite Plan”) upon the acquisition as of June 1, 2022. The activity is included in the tables within this footnote.

 

Additionally, the Company sponsors defined contribution pension plans made available to all domestic and Canadian employees. The Company funds the cost of these benefits as incurred.

 

9

 

The Company also sponsors a non-contributory defined benefit postretirement health care plan that provides health benefits to certain domestic and Canadian retirees and eligible spouses and dependent children. The Company funds the cost of these benefits as incurred.

 

The following tables present the components of net periodic benefit costs:

 

   

Pension Benefits

   

Postretirement Benefits

 
   

Three Months Ended
June 30,

   

Three Months Ended
June 30,

 
   

2023

   

2022

   

2023

   

2022

 

Service cost

  $ 530     $ 482     $ 209     $ 287  

Interest cost

    635       711       299       190  

Expected return on plan assets

    (657 )     (692 )     -       -  

Amortization of prior service cost

    -       -       (249 )     (283 )

Recognized actuarial loss

    301       481       (9 )     92  

Settlement loss

    -       1,597       -       -  

Net periodic benefit cost (a)

  $ 809     $ 2,579     $ 250     $ 286  

 

 

 

Pension Benefits

 

Postretirement Benefits

 
 

Six Months Ended
June 30,

 

Six Months Ended
June 30,

 
 

2023

 

2022

 

2023

 

2022

 

Service cost

$ 1,060   $ 1,146   $ 417   $ 573  

Interest cost

  1,270     1,165     598     380  

Expected return on plan assets

  (1,314 )   (1,504 )   -     -  

Amortization of prior service cost

  -     -     (497 )   (565 )

Recognized actuarial loss

  601     935     (18 )   184  

Settlement loss

  -     1,597     -     -  

Net periodic benefit cost (a)

$ 1,617   $ 3,339   $ 500   $ 572  

 

(a)

The components of net periodic cost other than the service cost component are included in Other income (expense), net in the Consolidated Statements of Income.

 

During the three and six months ended June 30, 2022, the Company recorded a settlement loss relating to retirees that received lump-sum distributions from the Company’s defined benefit pension plan totaling $1.6 million. There were no settlement losses recorded for the three or six month periods ended June 30, 2023. These changes were the result of lump-sum payments to retirees exceeding the Plan’s actuarial service and interest cost.

 

10

 

 

NOTE 8 ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)          

 

The components of Accumulated other comprehensive income (loss) as reported in the Consolidated Balance Sheets are:

 

   

Currency

Translation

Adjustments

   

Deferred Gain

(Loss) on Cash

Flow Hedging

   

Pension and

OPEB

Adjustments

   

Accumulated

Other

Comprehensive

(Loss) Income

 

Balance at December 31, 2022

  $ (10,619

)

  $ (617

)

  $ (13,238

)

  $ (24,474 )

Reclassification adjustments

    -       (588 )     583       (5 )

Current period benefit (charge)

    278       2,023       (72 )     2,229  

Income tax benefit (charge)

    -       (341 )     (145 )     (486 )

Balance at June 30, 2023

  $ (10,341 )   $ 477     $ (12,872 )   $ (22,736 )

 

   

Currency

Translation

Adjustments

   

Deferred Gain

(Loss) on Cash

Flow Hedging

   

Pension and

OPEB

Adjustments

   

Accumulated

Other

Comprehensive

(Loss) Income

 

Balance at December 31, 2021

  $ (7,851 )   $ -     $ (22,479 )   $ (30,330 )

Reclassification adjustments

    -       -       2,716       2,716  

Current period benefit (charge)

    (2,864 )     -       -       (2,864 )

Income tax benefit (charge)

    -       -       (630 )     (630 )

Balance at June 30, 2022

  $ (10,715 )   $ -     $ (20,393 )   $ (31,108 )

 

 

NOTE 9 COMMON SHARE REPURCHASES

 

The Company has a share repurchase program with the authorization to purchase up to $50.0 million of the Company’s common shares. As of June 30, 2023, the Company had $48.1 million available for repurchase under the share repurchase program. During the six-month period ending June 30, 2023, the Company repurchased 36,105 shares at an average cost per share of $28.51 for a total of $1.0 million in the surrender of common shares to cover taxes in connection with the vesting of stock awards, which were not part of the share repurchase program. During the six-month period ending June 30, 2022, the Company repurchased 24,546 shares at an average cost per share of $37.39 for a total of $0.9 million. No shares were repurchased during the three month periods ending June 30, 2023 and 2022.

 

 

NOTE 10 FINANCING ARRANGEMENTS

 

Debt consisted of:

               

Senior Secured Credit Agreement

 

June 30, 2023

   

December 31, 2022

 

Senior term loan facility

  $ 332,500     $ 341,250  

Credit facility

    17,000       17,000  

Subordinated Credit Agreement

               

Subordinated credit facility

    90,000       90,000  

Total debt

    439,500       448,250  

Unamortized discount and debt issuance fees

    (10,595 )     (11,423 )

Total debt, net

    428,905       436,827  

Less: current portion of long-term debt

    (17,500 )     (17,500 )

Total long-term debt, net

  $ 411,405     $ 419,327  

 

The carrying value of long term debt, including the current portion, approximates fair value as the variable interest rates approximate rates available to other market participants with comparable credit risk.

 

11

 

Senior Secured Credit Agreement

 

On May 31, 2022, the Company entered into a Senior Secured Credit Agreement with several lenders, which provides a term loan of $350.0 million (“Senior Term Loan Facility”) and a revolving credit facility up to $100.0 million (“Credit Facility”). The Credit Facility has a letter of credit sublimit of up to $15.0 million, as a sublimit of the Credit Facility, and a swing line subfacility of up to $20.0 million, as a sublimit of the Credit Facility. The Company borrowed $5.0 million under the Credit Facility, which, along with the Senior Term Loan Facility, and cash-on-hand and the proceeds of the Subordinated Credit Facility described below, was used to purchase the assets of Fill-Rite as described in “Note 2 – Acquisitions”. The Company has agreed to secure all of its obligations under the Senior Secured Credit Agreement by granting a first priority lien on substantially all of its personal property, and each of Patterson Pump Company, AMT Pump Company, National Pump Company and Fill-Rite Company (collectively, the “Guarantors”) has agreed to guarantee the obligations of the Company under the Senior Secured Credit Agreement and to secure the obligations thereunder by granting a first priority lien in substantially all of such Guarantor’s personal property.

 

The Senior Secured Credit Agreement has a maturity date of May 31, 2027, with the Senior Term Loan Facility requiring quarterly installment payments commencing on September 30, 2022 and continuing on the last day of each consecutive December, March, June and September thereafter.

 

At the option of the Company, borrowings under the Senior Term Loan Facility and under the Credit Facility bear interest at either a base rate or at an Adjusted Term SOFR Rate, plus the applicable margin, which ranges from 0.75% to 1.75% for base rate loans and 1.75% to 2.75% for Adjusted Term SOFR Rate loans. The applicable margin is based on the Company’s senior leverage ratio. As of June 30, 2023, the applicable interest rate under the Senior Secured Credit Agreement was Adjusted Term SOFR plus 2.5%.

 

The Senior Secured Credit Agreement includes covenants requiring the Company to maintain certain maximum leverage ratios and a minimum fixed charge coverage ratio. On June 30, 2023, the Senior Secured Credit Agreement was amended to provide the Company with more flexibility by adjusting the minimum fixed charge coverage ratio to not less than 1.00 to 1.00 for each four consecutive fiscal quarter periods ending June 30, 2023 through and including June 30, 2024 and not less than 1.10 to 1.00 for each four consecutive fiscal quarter periods ending September 30, 2024 through and including December 31, 2024. We were in compliance with all of our debt covenants as of June 30, 2023, including those covenants as they were in effect prior to the amendment of the Senior Secured Credit Agreement.

 

Subordinated Credit Agreement

 

On May 31, 2022, the Company entered into an unsecured subordinated credit agreement (“Subordinated Credit Agreement”) which provides for a term loan of $90.0 million (the “Subordinated Credit Facility”). Each of the Guarantors has agreed to guarantee the obligations of the Company under the Subordinated Credit Agreement. The proceeds from the Subordinated Credit Facility, along with cash-on-hand and the proceeds of the Senior Term Loan Facility described above, were used to purchase the assets of Fill-Rite as described in “Note 2 – Acquisitions”.

 

The Subordinated Credit Agreement has a maturity date of December 1, 2027. If the Subordinated Credit Facility is prepaid prior to the second anniversary, such prepayment must be accompanied by a make-whole premium. If the Subordinated Credit Facility is prepaid after the second anniversary but prior to the third anniversary, such prepayment requires a prepayment fee of 2%, and if the Subordinated Credit Facility is prepaid after the third anniversary but prior to the fourth anniversary, such prepayment requires a prepayment fee of 1%.

 

At the option of the Company, borrowings under the Subordinated Credit Facility bear interest at either a base rate plus 8.0%, or at an Adjusted Term SOFR Rate plus 9.0%. As of June 30, 2023 borrowings under the Subordinated Credit Facility bear interest at an Adjusted Term SOFR Rate plus 9.1%.

 

The Subordinated Credit Agreement includes covenants subject to maximum leverage ratios. We were in compliance with all of our debt covenants as of June 30, 2023.

 

Interest Rate Derivatives

 

The Company entered into interest rate swaps that hedge interest payments on its SOFR borrowing during the fourth quarter of 2022. All swaps have been designated as cash flow hedges. The following table summarizes the notional amounts, related rates and remaining terms of interest swap agreements as of June 30, 2023 and December 31, 2022:

 

   

Notional Amount

   

Average Fixed Rate

     
   

June 30,

2023

   

December 31,

2022

   

June 30,

2023

   

December 31,

2022

    Term

Interest rate swaps

  $ 166,250     $ 170,600       4.1 %     4.1 %  

Extending to May 2027

 

12

 

The fair value of the Company’s interest rate swaps was a receivable of $0.6 million as of June 30, 2023 and a payable of $0.8 million as of December 31, 2022. The fair value was based on inputs other than quoted prices in active markets for identical assets that are observable either directly or indirectly and therefore considered level 2. The mark-to-market effect of interest rate swap agreements that are considered effective as hedges has been included in Accumulated Other Comprehensive Loss. The interest rate swap agreements held by the Company on June 30, 2023 are expected to continue to be effective hedges.

 

The following table summarizes the fair value of derivative instruments as recorded in the Consolidated Balance Sheets:

 

   

June 30, 2023

   

December 31, 2022

 
Current Assets:                

Prepaid and Other

  $ 1,879     $ 1,203  
Long-term liabilities:                

Other long-term liabilities

    (1,253 )     (2,012 )

Total derivatives

  $ 626     $ (809 )

 

The following table summarizes total gains (losses) recognized on derivatives:

 

Derivatives in Cash

Flow Hedging

Relationships

 

Location of (Loss) Gain

Recognized in Income on

Derivatives

 

Amount of (Loss) Gain Recognized in Income on Derivatives

 
       

Three Months Ended
June 30,

   

Six Months Ended
June 30,

 
       

2023

   

2022

   

2023

   

2022

 

Interest rate swaps

 

Interest Expense

  $ 397     $ -     $ 588     $ -  

 

The effects of derivative instruments on the Company’s Consolidated Statements of Results of Operations and Comprehensive Income (Loss) for OCI are as follows:

 

Derivatives in Cash

Flow Hedging

Relationships

 

Amount of (Loss) Gain

Recognized in AOCI on

Derivatives

 

Location of (Loss) Gain

Reclassed from AOCI into

Income (Effective Portion)

 

Amount of (Loss) Gain

Reclassed from AOCI into

Income (Effective Portion)

 
   

Three Months Ended
June 30,

     

Three Months Ended
June 30,

 
   

2023

   

2022

     

2023

   

2022

 

Interest rate swaps

  $ 3,842     $ -  

Interest expense

  $ (397 )   $ -  

 

 

Derivatives in Cash

Flow Hedging

Relationships

 

Amount of (Loss) Gain

Recognized in AOCI on

Derivatives

 

Location of (Loss) Gain

Reclassed from AOCI into

Income (Effective Portion)

 

Amount of (Loss) Gain

Reclassed from AOCI into

Income (Effective Portion)

 
   

Six Months Ended
June 30,

     

Six Months Ended
June 30,

 
   

2023

   

2022

     

2023

   

2022

 

Interest rate swaps

  $ 2,023     $ -  

Interest expense

  $ (588 )   $ -  

 

 

NOTE 11 – LEASES

 

On June 1, 2023, the Company commenced a lease for a new manufacturing facility in Lenexa Kansas with an initial lease term through August 31, 2043. The Company will vacate its current leased Lenexa manufacturing facility on August 31, 2023, with no additional lease liability after that date. The new lease is considered an operating lease and is subject to annual rent escalations based on the greater of a set minimum percentage or the Consumer Price Index. As result of this lease, the Company recorded a right-of-use (ROU) asset which is included in Other Assets, and a long-term lease liability, which is included in Other Long-Term Liabilities, each of approximately $17.5 million as of June 30, 2023. The impact on the Consolidated Statements of Income for the three and six month periods ended June 30, 2023 was not material.

 

13

 

 

 

ITEM 2.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

(Dollars in thousands, except for per share amounts)

 

The following discussion and analysis of the Company’s financial condition and Results of Operations should be read in conjunction with the Consolidated Financial Statements, and notes thereto, and the other financial data included elsewhere in this Quarterly Report on Form 10-Q. The following discussion should also be read in conjunction with the Company’s audited Consolidated Financial Statements and accompanying notes, and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in its Annual Report on Form 10-K for the year ended December 31, 2022.

 

Executive Overview

 

The Gorman-Rupp Company (“we”, “our”, “Gorman-Rupp” or the “Company”) is a leading designer, manufacturer and international marketer of pumps and pump systems for use in diverse water, wastewater, construction, dewatering, industrial, petroleum, original equipment, agriculture, fire suppression, heating, ventilating and air conditioning (HVAC), military and other liquid-handling applications. The Company attributes its success to long-term product quality, applications and performance combined with timely delivery and service, and continually seeks to develop initiatives to improve performance in these key areas.

 

We regularly invest in training for our employees, in new product development and in modern manufacturing equipment, technology and facilities all designed to increase production efficiency and capacity and drive growth by delivering innovative solutions to our customers. We believe that the diversity of our markets is a major contributor to the generally stable financial growth we have produced historically.

 

On May 31, 2022, the Company acquired the assets of Fill-Rite and Sotera (“Fill-Rite”), a division of Tuthill Corporation, for $528.0 million. When adjusted for approximately $80.0 million in expected tax benefits, the net transaction value was approximately $448.0 million. The Company funded the transaction with cash on-hand and new debt. The Company incurred $7.1 million of one-time acquisition costs during the year ended December 31, 2022 and does not expect to incur material acquisition costs in connection with the transaction going forward. The results of operations for Fill-Rite are included in the Company’s Consolidated Statements of Income from the acquisition date.

 

The Company’s backlog of orders was $249.8 million at June 30, 2023 compared to $264.7 million at June 30, 2022 and $267.4 million at December 31, 2022. Incoming orders for the first six months of 2023 were $321.0 million, or an increase of 12.0% compared to the same period in 2022, and a decrease of 13.8% excluding Fill-Rite.

 

On July 27, 2023, the Board of Directors authorized the payment of a quarterly dividend of $0.175 per share on the common stock of the Company, payable September 8, 2023, to shareholders of record as of August 15, 2023. This will mark the 294th consecutive quarterly dividend paid by The Gorman-Rupp Company.

 

The Company currently expects to continue its exceptional history of paying regular quarterly dividends and increased annual dividends. However, any future dividends will be reviewed individually and declared by our Board of Directors at its discretion, dependent on our assessment of the Company’s financial condition and business outlook at the applicable time.

 

Outlook

 

The Company’s backlog is down from the record level at the end of the first quarter of 2023 but remains elevated, which positions us well for the remainder of the year.  We believe that our inventory levels have peaked and that we will see a reduction in the second-half, which will further contribute to our improvements in cash flow. We remain focused on delivering long term sustained growth and continuing to improve our debt leverage.

 

14

 

Three Months Ended June 30, 2023 vs. Three Months Ended June 30, 2022

 

Net Sales

 

The following table presents the Company’s disaggregated net sales by its end markets for the three months ended June 30, 2023 and June 30, 2022:

 

   

Three Months Ended
June 30,

                 
   

2023

   

2022

   

$ Change

   

% Change

 

Industrial

  $ 22,786     $ 18,664     $ 4,122       22.1 %

Fire

    36,935       27,904       9,031       32.4 %

Agriculture

    5,027       5,195       (168 )     (3.2 )%

Construction

    11,921       10,073       1,848       18.3 %

Municipal

    19,549       16,950       2,599       15.3 %

Petroleum

    3,719       2,631       1,088       41.4 %

OEM

    9,480       9,300       180       1.9 %

Repair parts

    18,722       14,809       3,913       26.4 %

Total net sales excluding Fill-Rite

    128,139       105,526       22,613       21.4 %

Fill-Rite

    42,885       13,541       29,344       216.7 %

Total net sales

  $ 171,024     $ 119,067     $ 51,957       43.6 %

 

Net sales for the second quarter of 2023 were $171.0 million compared to net sales of $119.1 million for the second quarter of 2022, an increase of 43.6% or $52.0 million. Domestic sales increased 50.3% or $42.9 million and international sales increased 26.8% or $9.0 million compared to the same period in 2022.

 

Fill-Rite sales were $42.9 million for the second quarter of 2023 compared to $13.5 million from the acquisition date of May 31, 2022 to June 30, 2022.  In addition to the increase at Fill-Rite, sales increased $22.6 million, or 21.4%, due to an increase in volume as well as the impact of two pricing increases taken in 2022 and an annual price increase in January 2023.  The Company’s two price increases in 2022, as well as the price increase in 2023 averaged between 4.0% - 5.0%.  Sales increased $9.0 million in the fire suppression market primarily from increased domestic commercial construction, $4.1 million in the industrial market and $3.9 million in the repair market due to strengthening in the broader industrial economy, $2.6 million in the municipal market due to domestic flood control and wastewater projects related to increased infrastructure investment, $1.9 million in the construction market due to strong overall conditions including infrastructure related projects, $1.1 million in the petroleum market due to increased demand for larger petroleum transfer pumps, and $0.2 million in the OEM market.  Partially offsetting these increases was a sales decrease of $0.2 million in the agriculture market primarily driven by weather conditions, where increased snowfall runoff and rain have slowed demand.

 

Cost of Products Sold and Gross Profit

 

   

Three Months Ended
June 30,

                 
   

2023

   

2022

   

$ Change

   

% Change

 

Cost of products sold

  $ 119,366     $ 90,828     $ 28,538       31.4 %

% of Net sales

    69.8 %     76.3 %                

Gross Margin

    30.2 %     23.7 %                

 

Gross profit was $51.7 million for the second quarter of 2023, resulting in gross margin of 30.2%, compared to gross profit of $28.2 million and gross margin of 23.7% for the same period in 2022.  The 650 basis point increase in gross margin included a 200 basis point improvement on labor and overhead leverage due to increased sales volume and sales mix which includes a full quarter of Fill-Rite.  The increase in gross margin also included a 450 basis point improvement in cost of material, which consisted of a reduction in LIFO expense of 210 basis points, a 120 basis point improvement from the realization of selling price increases, and a favorable impact of 120 basis points related to the Fill-Rite inventory step-up that was recorded during the second quarter of 2022 that did not recur in 2023.

 

15

 

Selling, General and Administrative (SG&A) Expenses

 

   

Three Months Ended
June 30,

                 
   

2023

   

2022

   

$ Change

   

% Change

 

Selling, general and administrative expenses

  $ 24,193     $ 24,114     $ 79       0.3 %

% of Net sales

    14.1 %     20.3 %                

 

Selling, general and administrative (“SG&A”) expenses were $24.2 million and 14.1% of net sales for the second quarter of 2023 compared to $24.1 million and 20.3% of net sales for the same period in 2022.  SG&A expenses for the second quarter of 2022 included $6.9 million of one-time acquisition costs.  Excluding acquisition costs, SG&A expenses were $17.2 million and 14.5 % of net sales for the second quarter of 2022.  The increase in SG&A expenses, excluding acquisition costs, was due to the inclusion of a full quarter of Fill-Rite as compared to one month in the same period in 2022, as well as increased expenses to support sales growth.  The improvement in SG&A as a percent of sales was primarily due to favorable leverage from increased sales.

 

Amortization expense

 

   

Three Months Ended
June 30,

                 
   

2023

   

2022

   

$ Change

   

% Change

 

Amortization expense

  $ 3,182     $ 1,218     $ 1,964       161.2 %

% of Net sales

    1.9 %     1.0 %                

 

Amortization expense was $3.2 million for the second quarter of 2023 compared to $1.2 million for the same period in 2022. The increase in amortization expense was due to a full quarter of amortization attributable to the Fill-Rite acquisition compared to one month for the same period in 2022.

 

Operating Income

 

   

Three Months Ended
June 30,

                 
   

2023

   

2022

   

$ Change

   

% Change

 

Operating Income

  $ 24,283     $ 2,907     $ 21,376       735.3 %

% of Net sales

    14.2 %     2.4 %                

 

Operating income was $24.3 million for the second quarter of 2023, resulting in an operating margin of 14.2%, compared to operating income of $2.9 million and operating margin of 2.4% for the same period in 2022.  Operating income for the second quarter of 2022 included $6.9 million of one-time acquisition costs and $1.4 million of inventory step-up amortization.  Excluding acquisition costs and inventory step-up totaling together $8.3 million, operating income was $11.2 million for the second quarter 2022 resulting in an operating margin of 9.4% of net sales.  Excluding acquisition costs and inventory step-up in the second quarter of 2022 totaling $8.3 million, operating margin in the second quarter of 2023 increased 480 basis points compared to the same period in 2022 due to improved leverage on labor, overhead, and SG&A expenses due to increased sales volumes and improved cost of material partially offset by increased amortization expense.

 

Interest Expense

 

   

Three Months Ended
June 30,

                 
   

2023

   

2022

   

$ Change

   

% Change

 

Interest Expense

  $ (10,485 )   $ (2,322 )   $ (8,163 )     351.6 %

% of Net sales

    (6.1 )%     (2.0 )%                

 

Interest expense was $10.5 million for the second quarter of 2023 compared to $2.3 million for the same period in 2022. The increase in interest expense was due to the inclusion of a full quarter of interest expense and increased interest rates on the debt financing attributable to the Fill-Rite acquisition.

 

16

 

Net Income (loss)

 

   

Three Months Ended
June 30,

                 
   

2023

   

2022

   

$ Change

   

% Change

 

Income (loss) before income taxes

  $ 13,262     $ (1,261 )   $ 14,523       1151.7 %

% of Net sales

    7.8 %     (1.1 %)                

Income taxes

  $ 2,785     $ (265 )   $ 3,050       1150.9 %

Effective tax rate

    21.0 %     21.0 %                

Net income (loss)

  $ 10,477     $ (996 )   $ 11,473       1151.9 %

% of Net sales

    6.1 %     (0.8 %)                

Earnings per share

  $ 0.40     $ (0.04 )   $ 0.44       1100.0 %

 

The Company’s effective tax rate was 21.0% for both the second quarter of 2023 and 2022.

 

Net income was $10.5 million, or $0.40 per share, for the second quarter of 2023 compared to net loss of ($1.0) million, or ($0.04) per share, in the second quarter of 2022. Adjusted earnings per share for the second quarter of 2023 were $0.41 per share compared to $0.27 per share for the second quarter of 2022. Adjusted earnings per share for the second quarter of 2023 included an unfavorable LIFO impact of $0.07 per share compared to an unfavorable LIFO impact of $0.13 per share in the second quarter of 2022. Adjusted earnings per share is a non-GAAP financial measure; see “Non-GAAP Financial Information” below for a definition of the measure and the reconciliation to its comparable GAAP financial measure.

 

Six Months Ended June 30, 2023 vs. Six Months Ended June 30, 2022

 

Net Sales

 

The following table presents the Company’s disaggregated net sales by its end markets for the six months ended June 30, 2023 and June 30, 2022:

 

   

Six Months Ended
June 30,

                 
   

2023

   

2022

   

$ Change

   

% Change

 

Industrial

  $ 43,731     $ 36,518     $ 7,213       19.8 %

Fire

    73,074       56,326       16,748       29.7 %

Agriculture

    9,776       10,207       (431 )     (4.2 )%

Construction

    22,949       19,238       3,711       19.3 %

Municipal

    36,973       31,257       5,716       18.3 %

Petroleum

    7,739       6,173       1,566       25.4 %

OEM

    18,490       18,031       459       2.5 %

Repair parts

    35,912       29,943       5,969       19.9 %

Total net sales excluding Fill-Rite

    248,644       207,693       40,951       19.7 %

Fill-Rite

    82,846       13,541       69,305       511.8 %

Total net sales

  $ 331,490     $ 221,234     $ 110,256       49.8 %

 

Net sales for the first six months of 2023 were $331.5 million compared to net sales of $221.2 million for the first six months of 2022, an increase of 49.8% or $110.3 million. Domestic sales increased 57.2% or $90.3 million and international sales increased 31.5% or $20.0 million compared to the same period in 2022.

 

Fill-Rite sales were $82.8 million for the first six months of 2023 compared to $13.5 million from the acquisition date of May 31, 2022 to June 30, 2022.  In addition to the increase from Fill-Rite, sales increased $41.0 million, or 19.7%, due to an increase in volume as well as the impact of two pricing increases taken in 2022 and an annual price increase in January 2023.  The Company’s two price increases in 2022, as well as the price increase in 2023 averaged between 4.0% - 5.0%.  Sales increased $16.7 million in the fire market primarily from increased domestic commercial construction, $7.2 million in the industrial market and $6.0 million in the repair market due to strengthening in the broader industrial economy, $5.7 million in the municipal market due to domestic flood control and wastewater projects related to increased infrastructure investment, $3.7 million in the construction market due to strong overall conditions including infrastructure related projects, $1.6 million in the petroleum market due to increased demand for larger petroleum transfer pumps, and $0.5 million in the OEM market.  Partially offsetting these increases was a decrease of $0.4 million in the agriculture market primarily driven by weather conditions, where increased snowfall runoff and rain have slowed demand.

 

17

 

Cost of Products Sold and Gross Profit

 

   

Six Months Ended
June 30,

                 
   

2023

   

2022

   

$ Change

   

% Change

 

Cost of products sold

  $ 234,309     $ 167,498     $ 66,811       39.9 %

% of Net sales

    70.7 %     75.7 %                

Gross Margin

    29.3 %     24.3 %                

 

Gross profit was $97.2 million for the first six months of 2023, resulting in gross margin of 29.3%, compared to gross profit of $53.7 million and gross margin of 24.3% for the same period in 2022.  The 500 basis point increase in gross margin included a 225 basis point improvement on labor and overhead leverage due to increased sales volume and sales mix which includes six months of Fill-Rite for 2023 compared to one month for the same period in 2022.  The increase in gross margin also included a 275 basis point improvement in cost of material, which consisted of a favorable LIFO impact of 140 basis points, a favorable impact of 60 basis points related to the Fill-Rite inventory step-up that was recorded in 2022 that did not recur in 2023 and a 75 basis point improvement in cost of material from the realization of selling price increases.

 

Selling, General and Administrative (SG&A) Expenses

 

   

Six Months Ended
June 30,

                 
   

2023

   

2022

   

$ Change

   

% Change

 

Selling, general and administrative expenses

  $ 47,430     $ 39,936     $ 7,494       18.8 %

% of Net sales

    14.3 %     18.1 %                

 

Selling, general and administrative (“SG&A”) expenses were $47.4 million and 14.3% of net sales for the first six months of 2023 compared to $39.9 million and 18.1% of net sales for the same period in 2022. SG&A expenses for the first six months of 2022 included $6.9 million of one-time acquisition costs.  Excluding acquisition costs of $6.9 million, SG&A expenses were $33.0 million, and 14.9% of net sales for the first six months of 2022. The increase in SG&A expenses, excluding acquisition costs, was due to the inclusion of Fill-Rite for the full six month period in 2022 as compared to one month in the same period in 2022, as well as increased expenses to support sales growth.  The improvement in SG&A as a percent of sales was primarily due to favorable leverage from increased sales.

 

Amortization expense

 

   

Six Months Ended
June 30,

                 
   

2023

   

2022

   

$ Change

   

% Change

 

Amortization expense

  $ 6,373     $ 1,435     $ 4,938       344.1 %

% of Net sales

    1.9 %     0.6 %                

 

Amortization expense was $6.4 million for the first six months of 2023 compared to $1.4 million for the same period in 2022. The increase in amortization expense was due to the inclusion of six months of amortization attributable to the Fill-Rite acquisition compared to one month for the same period in 2022.

 

Operating Income

 

   

Six Months Ended
June 30,

                 
   

2023

   

2022

   

$ Change

   

% Change

 

Operating Income

  $ 43,378     $ 12,365     $ 31,013       250.8 %

% of Net sales

    13.1 %     5.6 %                

 

18

 

Operating income was $43.4 million for the first six months of 2023, resulting in an operating margin of 13.1%, compared to operating income of $12.4 million and operating margin of 5.6% for the same period in 2022.  Operating income for the first six months of 2022 included $6.9 million of one-time acquisition costs and $1.4 million of inventory step up amortization.  Excluding acquisition costs and inventory step-up totaling together $8.3 million, operating income was $20.7 million for the first six months of 2022 resulting in an operating margin of 9.4% of net sales.  Excluding acquisition costs and inventory step-up in 2022 totaling $8.3 million operating margin in the first six months of 2023 increased 370 basis points compared to the same period in 2022 due to improved leverage on labor, overhead, and SG&A expenses due to increased sales volumes and improved cost of material partially offset by increased amortization expense.

 

Interest Expense

 

   

Six Months Ended
June 30,

                 
   

2023

   

2022

   

$ Change

   

% Change

 

Interest Expense

  $ (20,672 )   $ (2,322 )   $ (18,350 )     790.3 %

% of Net sales

    (6.2 )%     (1.0 )%                

 

Interest expense was $20.7 million for the first six months of 2023 compared to $2.3 million for the same period in 2022. The increase in interest expense was primarily due to the inclusion of six months of interest expense in 2023 compared to one month for the first six months of 2022 on the debt financing attributable to the Fill-Rite acquisition, as well as increased interest rates in 2023 as compared to 2022.

 

Net Income (loss)

 

   

Six Months Ended
June 30,

                 
   

2023

   

2022

   

$ Change

   

% Change

 

Income (loss) before income taxes

  $ 21,737     $ 8,287     $ 13,450       162.3 %

% of Net sales

    6.6 %     3.7 %                

Income taxes

  $ 4,740     $ 1,740     $ 3,000       172.4 %

Effective tax rate

    21.8 %     21.0 %                

Net income (loss)

  $ 16,997     $ 6,547     $ 10,450       159.6 %

% of Net sales

    5.1 %     3.0 %                

Earnings per share

  $ 0.65     $ 0.25     $ 0.40       160.0 %

 

The Company’s effective tax rate was 21.8% for the first six months of 2023 compared to 21.0% for the first six months of 2022.

 

Net income was $17.0 million, or $0.65 per share, for the first six months of 2023 compared to net income of $6.5 million, or $0.25 per share for the first six months of 2022. Adjusted earnings per share for the first six months of 2023 were $0.68 per share compared to $0.56 per share for the first six months of 2022. Adjusted earnings per share for the first six months of 2023 included an unfavorable LIFO impact of $0.13 per share compared to an unfavorable LIFO impact of $0.18 per share in the first six months of 2022. Adjusted earnings per share is a non-GAAP financial measure; see “Non-GAAP Financial Information” below for a definition of the measure and the reconciliation to its comparable GAAP financial measure.

 

Non-GAAP Financial Information

 

The discussion of Results of Operations above includes certain non-GAAP financial data and measures such as adjusted earnings, adjusted earnings per share, and adjusted earnings before interest, taxes, depreciation and amortization.  Adjusted earnings is earnings excluding non-cash pension settlement charges, one-time acquisition costs, amortization of step up in value of acquired inventories, and amortization of customer backlog. Adjusted earnings per share is earnings per share excluding non-cash pension settlement charges per share, one-time acquisition costs per share, amortization of step up in value of acquired inventories per share, and amortization of customer backlog per share. Adjusted earnings before interest, taxes, depreciation and amortization is net income (loss) excluding interest, taxes, depreciation and amortization, adjusted to exclude non-cash pension settlement charges, one-time acquisition costs, amortization of step up in value of acquired inventories, amortization of customer backlog, and non-cash LIFO expense. Management utilizes these adjusted financial data and measures to assess comparative operations against those of prior periods without the distortion of non-comparable factors. The inclusion of these adjusted measures should not be construed as an indication that the Company’s future results will be unaffected by unusual or infrequent items or that the items for which the Company has made adjustments are unusual or infrequent or will not recur. Further, the impact of the LIFO inventory costing method can cause results to vary substantially from company to company depending upon whether they elect to utilize LIFO and depending upon which method they may elect. The Gorman-Rupp Company believes that these non-GAAP financial data and measures also will be useful to investors in assessing the strength of the Company’s underlying operations from period to period. These non-GAAP financial measures are not intended to replace GAAP financial measures, and they are not necessarily standardized or comparable to similarly titled measures used by other companies. Provided below is a reconciliation of adjusted earnings, adjusted earnings per share, and adjusted earnings before interest, taxes, depreciation and amortization.

 

19

 

   

Three Months Ended
June 30,

   

Six Months Ended
June 30,

 
   

2023

   

2022

   

2023

   

2022

 

Adjusted earnings:

                               

Reported net income (loss) – GAAP basis

  $ 10,477     $ (996 )   $ 16,997     $ 6,547  

Plus pension settlement charge

    -       1,261       -       1,261  

Plus one-time acquisition costs

    -       5,446       -       5,446  

Plus amortization of step up in value of acquired inventories

    -       1,111       -       1,111  

Plus amortization of acquired customer backlog

    344       171       857       171  

Non-GAAP adjusted earnings

  $ 10,821     $ 6,993     $ 17,854     $ 14,536  

 

   

Three Months Ended
June 30,

   

Six Months Ended
June 30,

 
   

2023

   

2022

   

2023

   

2022

 

Adjusted earnings per share:

                               

Reported earnings (loss) per share – GAAP basis

  $ 0.40     $ (0.04 )   $ 0.65     $ 0.25  

Plus pension settlement charge

    -       0.05       -       0.05  

Plus one-time acquisition costs

    -       0.21       -       0.21  

Plus amortization of step up in value of acquired inventories

    -       0.04       -       0.04  

Plus amortization of acquired customer backlog

    0.01       0.01       0.03       0.01  

Non-GAAP adjusted earnings per share

  $ 0.41     $ 0.27     $ 0.68     $ 0.56  
                                 

Adjusted earnings (loss) before interest, taxes, depreciation and amortization:

                               

Reported net income (loss) –GAAP basis

  $ 10,477     $ (996 )   $ 16,997     $ 6,547  

Plus interest expense

    10,485       2,322       20,672       2,322  

Plus provision (benefit) for income taxes

    2,785       (265 )     4,740       1,740  

Plus depreciation and amortization expense

    7,114       4,268       14,158       7,201  

Non-GAAP earnings before interest, taxes, depreciation and amortization

    30,861       5,329       56,567       17,810  

Plus pension settlement charge

    -       1,597       -       1,597  

Plus one-time acquisition costs

    -       6,894       -       6,894  

Plus amortization of step up in value of acquired inventories

    -       1,406       -       1,406  

Plus amortization of acquired customer backlog

    434       217       1,085       217  

Plus non-cash LIFO expense

    2,409       4,200       4,440       6,004  

Non-GAAP adjusted earnings before interest, taxes, depreciation and amortization

  $ 33,704     $ 19,643     $ 62,092     $ 33,928  

 

Liquidity and Capital Resources

 

Our primary sources of liquidity are cash generated from operations and borrowings under our Credit Facility. Cash and cash equivalents totaled $12.2 million at June 30, 2023. The Company had an additional $80.9 million available under the revolving credit facility after deducting $17.0 million drawn and $2.1 million in outstanding letters of credit primarily related to customer orders. We believe we have adequate liquidity from funds on hand and borrowing capacity to execute our financial and operating strategy, as well as comply with debt obligation and financial covenants for at least the next 12 months.

 

20

 

As of June 30, 2023, the Company had $439.5 million in total debt outstanding due in 2027. The Company was in compliance with its debt covenants, including limits on additional borrowings and maintenance of certain operating and financial ratios, at June 30, 2023 and December 31, 2022.

 

Capital expenditures for the first six months of 2023 were $13.3 million and consisted primarily of machinery and equipment and building improvements. Capital expenditures for the full-year 2023 are presently planned to be in the range of $18-$20 million primarily for building improvements and machinery and equipment purchases, and are expected to be financed through internally-generated funds.

 

On July 27, 2023, the Board of Directors authorized the payment of a quarterly dividend of $0.175 per share on the common stock of the Company, payable September 8, 2023, to shareholders of record as of August 15, 2023. This will mark the 294th consecutive quarterly dividend paid by The Gorman-Rupp Company. The Company currently expects to continue its exceptional history of paying regular quarterly dividends and increased annual dividends. However, any future dividends will be reviewed individually and declared by our Board of Directors at its discretion, dependent on our assessment of the Company’s financial condition and business outlook at the applicable time.

 

The Board of Directors has authorized a share repurchase program of up to $50.0 million of the Company’s common shares. The actual number of shares repurchased will depend on prevailing market conditions, alternative uses of capital and other factors, and will be determined at management’s discretion. The Company is not obligated to make any purchases under the program, and the program may be suspended or discontinued at any time. As of June 30, 2023, the Company had $48.1 million available for repurchase under the share repurchase program.

 

Financial Cash Flow

 

   

Six Months Ended
June 30,

 
   

2023

   

2022

 

Beginning of period cash and cash equivalents

  $ 6,783     $ 125,194  

Net cash provided by operating activities

    37,856       6,692  

Net cash used for investing activities

    (12,903 )     (534,538 )

Net cash provided by (used for) financing activities

    (19,461 )     419,983  

Effect of exchange rate changes on cash

    (102 )     (503 )

Net increase (decrease) in cash and cash equivalents

  $ 5,390     $ (108,366 )

End of period cash and cash equivalents

  $ 12,173     $ 16,828  

 

The increase in cash provided by operating activities in the first six months of 2023 compared to the same period last year was primarily due to increased earnings before depreciation, amortization, and LIFO expense, and improved cash flow from better working capital management.

 

During the first six months of 2023, investing activities of $12.9 million consisted of $13.3 million for capital expenditures primarily for machinery and equipment. During the first six months of 2022, investing activities of $534.5 million consisted of $526.3 million for the acquisition of Fill-Rite and $8.4 million for capital expenditures primarily for machinery and equipment.

 

Net cash used for financing activities for the first six months of 2023 primarily consisted of net payments on bank borrowings of $8.8 million, dividend payments of $9.1 million, and share repurchases of $1.0 million. Net cash received for financing activities for the first six months of 2022 consisted of proceeds from the new Senior Term Loan Facility of $350.0 million, $90.0 million in unsecured subordinated debt, and $5.0 million from the new revolving credit facility. Partially offsetting these proceeds were debt issuance fees paid of $15.2 million, dividend payments of $8.9 million and share repurchases of $0.9 million during the first six months of 2022.

 

Critical Accounting Policies

 

Our critical accounting policies are described in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and in the notes to our Consolidated Financial Statements for the year ended December 31, 2022 contained in our Annual Report on Form 10-K for the year ended December 31, 2022. Any new accounting policies or updates to existing accounting policies as a result of new accounting pronouncements have been discussed in the notes to our Consolidated Financial Statements in this Quarterly Report on Form 10-Q. The application of our critical accounting policies may require management to make judgments and estimates about the amounts reflected in the Consolidated Financial Statements. Management uses historical experience and all available information to make these estimates and judgments, and different amounts could be reported using different assumptions and estimates.

 

21

 

Cautionary Note Regarding Forward-Looking Statements

 

In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, The Gorman-Rupp Company provides the following cautionary statement: This Form 10-Q contains various forward-looking statements based on assumptions concerning The Gorman-Rupp Company’s operations, future results and prospects. These forward-looking statements are based on current expectations about important economic, political, and technological factors, among others, and are subject to risks and uncertainties, which could cause the actual results or events to differ materially from those set forth in or implied by the forward-looking statements and related assumptions.

 

Such uncertainties include, but are not limited to, our estimates of future earnings and cash flows, general economic conditions and supply chain conditions and any related impact on costs and availability of materials, integration of the Fill-Rite business in a timely and cost effective manner, retention of supplier and customer relationships and key employees, the ability to achieve synergies and cost savings in the amounts and within the time frames currently anticipated and the ability to service and repay indebtedness incurred in connection with the transaction. Other factors include, but are not limited to: company specific risk factors including (1) loss of key personnel; (2) intellectual property security; (3) acquisition performance and integration; (4) the Company’s indebtedness and how it may impact the Company’s financial condition and the way it operates its business; (5) general risks associated with acquisitions; (6) the anticipated benefits from the Fill-Rite transaction may not be realized; (7) impairment in the value of intangible assets, including goodwill; (8) defined benefit pension plan settlement expense; (9) LIFO inventory method, and (10) family ownership of common equity; and general risk factors including (11) continuation of the current and projected future business environment; (12) highly competitive markets; (13) availability and costs of raw materials and labor; (14) cyber security threats; (15) compliance with, and costs related to, a variety of import and export laws and regulations; (16) environmental compliance costs and liabilities; (17) exposure to fluctuations in foreign currency exchange rates; (18) conditions in foreign countries in which The Gorman-Rupp Company conducts business; (19) changes in our tax rates and exposure to additional income tax liabilities; and (20) risks described from time to time in our reports filed with the Securities and Exchange Commission. Except to the extent required by law, we do not undertake and specifically decline any obligation to review or update any forward-looking statements or to publicly announce the results of any revisions to any of such statements to reflect future events or developments or otherwise.

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We are exposed to various market risks, including changes in foreign currency exchange rates and interest rates. Exposure to foreign exchange rate risk is due to certain costs and revenue being denominated in currencies other than one of the Company’s subsidiaries functional currency. The Company is also exposed to market risk as the result of changes in interest rates which may affect the cost of financing. We continually monitor these risks and regularly develop appropriate strategies to manage them. Accordingly, from time to time, we may enter into certain derivative or other financial instruments. These financial instruments are used to mitigate market exposure and are not used for trading or speculative purposes.

 

Interest Rate Risk

 

The results of operations are exposed to changes in interest rates primarily with respect to borrowings under the Company’s Senior Term Loan Facility, Credit Facility, and Subordinated Credit Facility. Borrowings under the Senior Term Loan Facility and Credit Facility may be made either at (i) a base rate plus the applicable margin, which ranges from 0.75% to 1.75%, or at (ii) an Adjusted Term SOFR Rate, plus the applicable margin, which ranges from 1.75% to 2.75%. Borrowings under the Subordinated Credit Facility bear interest at (i) either a base rate plus 8.0%, or at (ii) an Adjusted Term SOFR Rate plus 9.1%. At June 30, 2023, the Company had $332.5 million in borrowings under the Senior Term Loan Facility, $17.0 million in borrowings under the Credit Facility, and $90.0 million in borrowings under the Subordinated Credit Facility. As of June 30, 2023, the applicable interest rates under the Senior Secured Credit Agreement and the Subordinated Credit Facility were Adjusted Term SOFR plus 2.5% and Adjusted Term SOFR plus 9.1%, respectively. 

 

To reduce the exposure to changes in the market rate of interest, effective October 31, 2022, the Company entered into interest rate swap agreements for a portion of the Senior Term Loan Facility. Terms of the interest rate swap agreements require the Company to receive a fixed interest rate and pay a variable interest rate. The interest rate swap agreements are designated as a cash flow hedge, and as a result, the mark-to-market gains or losses will be deferred and included as a component of accumulated other comprehensive income (loss) and reclassified to interest expense in the period during which the hedged transactions affect earnings. 

 

The Company estimates that a hypothetical increase of 100 basis points in interest rates would increase interest expense by approximately $2.7 million on an annual basis.

 

22

 

Foreign Currency Risk

 

The Company’s foreign currency exchange rate risk is limited primarily to the Euro, Canadian Dollar, South African Rand and British Pound. The Company manages its foreign exchange risk principally through invoicing customers in the same currency as is used in the market of the source of products. The foreign currency transaction gains (losses) for the six month periods ending June 30, 2023 and 2022 were ($0.4) million and $0.1 million, respectively, and are reported within Other (expense) income, net on the Consolidated Statements of Income.

 

ITEM 4.

CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

The Company maintains a set of disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. The Company’s disclosure controls and procedures are also designed to ensure that information required to be disclosed in Company reports filed under the Securities Exchange Act of 1934 is accumulated and communicated to the Company’s management, including the principal executive officer and the principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

 

An evaluation was carried out under the supervision and with the participation of the Company’s management, including the principal executive officer and the principal financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this report on Form 10-Q. Based on that evaluation, the principal executive officer and the principal financial officer have concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2023.

 

Changes in Internal Control Over Financial Reporting

 

As of June 30, 2023, we are in the process of integrating the internal controls of the acquired Fill-Rite business into Gorman-Rupp’s existing operations as part of planned integration activities. In addition, we have implemented new processes and internal controls to assist us in the preparation and disclosure of financial information. There were no other changes in Gorman-Rupp’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, Gorman-Rupp’s internal control over financial reporting during the quarter ended June 30, 2023.

 

PART II. OTHER INFORMATION

 

ITEM 1.

LEGAL PROCEEDINGS

 

There are no material changes from the legal proceedings previously reported in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

 

ITEM 1A.

RISK FACTORS

 

In addition to the information set forth in this report, you should carefully consider the risk factors disclosed in Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

 

23

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

Issuer purchases of its common shares during the second quarter of 2023 were:

 

Period

 

Total number

of shares

purchased

   

Average price

paid per share

   

Total number of

shares purchased as

part of publicly

announced program

   

Approximate dollar

value of shares that may

yet be purchased under

the program

 

April 1 to April 30, 2023

    -       -       -     $ 48,067  

May 1 to May 31, 2023

    -       -       -       48,067  

June 1 to June 30, 2023

    -       -       -       48,067  

Total

    -       -       -     $ 48,067  

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES.

 

None.

 

ITEM 4.

MINE SAFETY DISCLOSURES.

 

Not applicable.

 

 

ITEM 5.

OTHER INFORMATION.

 

During the quarter ended June 30, 2023, no director or officer of the Company adopted or terminated any Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement, each as defined in Item 408 of Regulation S-K.

 

24

 

 

ITEM 6.

EXHIBITS

 

Exhibit 10.1

Amendment No. 1 dated as of June 30, 2023 to the Credit Agreement dated as of May 31, 2022

Exhibit 31.1

Certification of Scott A. King, President and Chief Executive Officer, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 31.2

Certification of James C. Kerr, Executive Vice President and Chief Financial Officer, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 32

Certification pursuant to 18 U.S.C Section 1350, as adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002

Exhibit 101

Financial statements from the Quarterly Report on Form 10-Q of The Gorman-Rupp Company for the quarter ended June 30, 2023, formatted in Inline eXtensible Business Reporting Language (XBRL): (i) the Consolidated Statements of Income, (ii) the Consolidated Statements of Comprehensive Income, (iii) the Consolidated Balance Sheets, (iv) the Consolidated Statements of Cash Flows, (v) the Consolidated Statements of Equity, and (vi) the Notes to Consolidated Financial Statements.

Exhibit 104

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

 

25

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

The Gorman-Rupp Company

   

(Registrant)

Date: July 31, 2023

   
 

By:

/s/James C. Kerr

   

James C. Kerr

   

Executive Vice President and Chief Financial Officer

   

(Principal Financial Officer)

 

 

26