THE GORMAN-RUPP COMPANY (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 endedDecember 31, 2022 . Executive Overview OnMay 31, 2022 , the Company acquired the assets of Fill-Rite and Sotera ("Fill-Rite"), a division ofTuthill 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 endedDecember 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 from the acquisition date are included in the Company's Consolidated Statements of Income for the three months endedMarch 31, 2023 . The following discussion of Results of Operations includes certain non-GAAP financial data and measures such as adjusted earnings per share and adjusted earnings before interest, taxes, depreciation and amortization. Adjusted earnings per share is earnings per share excluding 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 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 per share and adjusted earnings before interest, taxes, depreciation and amortization. Three Months Ended March 31, 2023 2022 Adjusted earnings per share: Reported earnings per share - GAAP basis $ 0.25 $
0.29
Plus amortization of acquired customer backlog 0.02
-
Non-GAAP adjusted earnings per share $ 0.27 $
0.29
Adjusted earnings before interest, taxes, depreciation and amortization: Reported net income-GAAP basis$ 6,520 $
7,543
Plus interest expense 10,187
-
Plus provision for income taxes 1,955
2,005
Plus depreciation and amortization 7,044
2,933
Non-GAAP earnings before interest, taxes, depreciation and amortization 25,706
12,481
Plus amortization of acquired customer backlog 650
-
Plus non-cash LIFO expense 2,032
1,804
Non-GAAP adjusted earnings before interest, taxes, depreciation and amortization$ 28,388 $ 14,285 13
--------------------------------------------------------------------------------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. The Company's backlog of orders was$270.6 million atMarch 31, 2023 compared to$195.5 million atMarch 31, 2022 and$267.4 million atDecember 31, 2022 . Fill-Rite added$11.1 million to the backlog atMarch 31, 2023 when compared toMarch 31, 2022 . Incoming orders during the first quarter of 2023 increased 49.1% when compared to the same period in 2022, and increased 12.3% excluding Fill-Rite. OnApril 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, payableJune 9, 2023 , to shareholders of record as ofMay 15, 2023 . This will mark the 293rd consecutive quarterly dividend paid byThe Gorman-Rupp Company . Outlook Incoming orders continued at a good pace, with total incoming orders during the quarter of$167.0 million , our backlog remains at record levels. Inventory grew as planned during the quarter to support our order volume and backlog, while we expect a reduction in inventory levels during the second-half of the year. We are focused on delivering long term sustained growth and continuing to improve margins.
Three Months Ended
Net Sales Three Months Ended March 31, 2023 2022 $ Change % Change Net Sales$ 160,466 $ 102,167 $ 58,299 57.1 % Net sales for the first quarter of 2023 were$160.5 million compared to net sales of$102.2 million for the first quarter of 2022, an increase of 57.1% or$58.3 million . Domestic sales increased 65.4% or$47.4 million and international sales increased 36.7% or$10.9 million compared to the same period in 2022. Fill-Rite sales, which are primarily domestic, were$40.0 million for the first quarter of 2023. Excluding Fill-Rite, sales in our water markets increased 20.1% or$14.5 million in the first quarter of 2023 compared to the first quarter of 2022. Sales increased$7.7 million in the fire suppression market,$3.1 million in the municipal market,$2.1 million in the repair market, and$1.9 million in the construction market. Partially offsetting these increases was a sales decrease of$0.3 million in the agriculture market.
Excluding Fill-Rite, sales in our non-water markets increased 12.8% or
Cost of Products Sold and Gross Profit
Three Months Ended
March 31,
2023 2022 $ Change % Change
Cost of products sold $ 114,943 $ 76,670 $ 38,273 49.9 %
% of Net sales 71.6 % 75.0 %
Gross Margin 28.4 % 25.0 %
14-------------------------------------------------------------------------------- Gross profit was$45.5 million for the first quarter of 2023, resulting in gross margin of 28.4%, compared to gross profit of$25.5 million and gross margin of 25.0% for the same period in 2022. The improvement in gross margin was due primarily to leverage from increased sales volume and sales mix which includes Fill-Rite in 2023. The 340 basis point increase in gross margin was driven by a 270 basis point improvement from labor and overhead leverage due to increased sales volume and a 70 basis point improvement in cost of material. Gross margin for the first quarter of 2023 includes 40 basis points of amortization expense related to the Fill-Rite acquired customer backlog. The acquired customer backlog will be fully amortized during the second quarter of 2023.
Selling, General and Administrative (SG&A) Expenses
Three Months Ended
March 31,
2023 2022 $ Change % Change
Selling, general and administrative
expenses $ 23,237 $ 15,878 $ 7,359 46.3 %
% of Net sales 14.5 % 15.5 %
Selling, general and administrative ("SG&A") expenses were $23.2 million and
14.5% of net sales for the first quarter of 2023 compared to $15.9 million and
15.5% of net sales for the same period in 2022. The increase in SG&A expenses is
primarily due to the inclusion of Fill-Rite. The improvement in SG&A as a
percent of sales was due to favorable leverage from increased sales.
Amortization Expense
Three Months Ended
March 31,
2023 2022 $ Change % Change
Amortization expense $ 3,191 $ 161 $ 3,030 1,882.0 %
% of Net sales 2.0 % 0.2 %
Amortization expense was $3.2 million for the first quarter of 2023 compared to
$0.2 million for the same period in 2022. The increase in amortization expense
was due to $3.0 million in amortization attributable to the Fill-Rite
acquisition.
Operating Income
Three Months Ended
March 31,
2023 2022 $ Change % Change
Operating income $ 19,095 $ 9,458 $ 9,637 101.9 %
% of Net sales 11.9 % 9.3 %
Operating income was $19.1 million for the first quarter of 2023, resulting in
an operating margin of 11.9%, compared to operating income of $9.5 million and
operating margin of 9.3% for the same period in 2022. Operating margin increased
260 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 partially
offset by increased amortization expense.
Interest Expense
Three Months Ended
March 31,
2023 2022 $ Change % Change
Interest Expense $ 10,187 $ - $ 10,187 100 %
% of Net sales 6.3 % - %
Interest expense was $10.2 million for the first quarter of 2023. No interest
expense was recorded in the first quarter of 2022. The interest expense was due
to debt financing attributable to the Fill-Rite acquisition.
Net Income
Three Months Ended
March 31,
2023 2022 $ Change % Change
Income before income taxes $ 8,475 $ 9,548 $ (1,073 ) (11.2 )%
% of Net sales 5.3 % 9.3 %
Income taxes $ 1,955 $ 2,005 $ (50 ) (2.5 )%
Effective tax rate 23.1 % 21.0 %
Net income $ 6,520 $ 7,543 $ (1,023 ) (13.6 )%
% of Net sales 4.1 % 7.4 %
Earnings per share $ 0.25 $ 0.29 $ (0.04 ) (13.8 )%
15--------------------------------------------------------------------------------
The Company's effective tax rate was 23.1% for the first quarter of 2023 compared to 21.0% for the first quarter of 2022 with the increase primarily related to discrete adjustments for the quarter.
Net income was$6.5 million , or$0.25 per share, for the first quarter of 2023 compared to net income of$7.5 million , or$0.29 per share, in the first quarter of 2022. Adjusted earnings per share for the first quarter of 2023 were$0.27 per share compared to$0.29 per share for the first quarter of 2022.
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 atMarch 31, 2023 . The Company had an additional$78.1 million available under the revolving credit facility after deducting$20.0 million drawn and$1.9 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. As ofMarch 31, 2023 , the Company had$446.9 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, atMarch 31, 2023 andDecember 31, 2022 . Capital expenditures for the first three months of 2023 were$6.5 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. OnApril 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, payableJune 9, 2023 , to shareholders of record as ofMay 15, 2023 . 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 ofMarch 31, 2023 , the Company had$48.1 million available for repurchase under the share repurchase program. Free cash flow, a non-GAAP measure for reporting cash flow, is defined by the Company as adjusted earnings before interest, income taxes and depreciation and amortization, less capital expenditures and dividends. The Company believes free cash flow provides investors with an important perspective on cash available for investments, acquisitions and working capital requirements.
The following table reconciles adjusted earnings before interest, income taxes and depreciation and amortization as reconciled above to free cash flow:
Three Months Ended
March 31,
2023 2022
Non-GAAP adjusted earnings before interest, taxes,
depreciation and amortization $ 28,388 $ 14,285
Less capital expenditures (6,450 ) (3,473 )
Less cash dividends (4,567 ) (4,436 )
Non-GAAP free cash flow $ 17,371 $ 6,376
16--------------------------------------------------------------------------------
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