The Gorman-Rupp Company — FY 2022 Form 10-K
Period and business: Fiscal year ended December 31, 2022; this is an annual report, not a standalone fourth-quarter report. Gorman-Rupp designs, manufactures and sells pumps and pump systems across water, wastewater, industrial and other markets. It operates as one business segment.
Financial performance
Unless noted otherwise, amounts are in millions of dollars. Comparisons are with FY 2021.
| Metric | FY 2022 | FY 2021 | Change |
|---|---|---|---|
| Net sales | $521.0 | $378.3 | +37.7% |
| Gross profit / margin | $130.9 / 25.1% | $95.9 / 25.3% | Margin down 0.2 percentage points |
| Operating income / margin | $40.2 / 7.7% | $39.4 / 10.4% | Income +2.1%; margin down 2.7 points |
| Income before tax | $13.9 | $37.2 | -62.8% |
| Net income / diluted EPS | $11.2 / $0.43 | $29.9 / $1.14 | Net income -62.5%; EPS -62.3% |
| Operating cash flow | $13.7 | $45.4 | Down $31.8 |
| Capital expenditures / dividends paid | $18.0 / $17.9 | $9.8 / $16.6 | Capex increased |
Management’s non-GAAP adjusted EPS was $0.94, versus $1.21 in 2021. Adjusted EBITDA was $88.7 million, versus $58.1 million. These measures exclude specified items and are not substitutes for GAAP results. Non-GAAP free cash flow, defined by the company as adjusted EBITDA less capital expenditures and dividends, was $52.9 million.
Material changes and drivers
- The May 31 acquisition of Fill-Rite and Sotera cost $528.0 million, funded with cash and new debt. Fill-Rite contributed $87.4 million of sales and $6.4 million of operating income after acquisition.
- Sales growth included $87.4 million from Fill-Rite. Excluding the acquisition, water-market sales rose 15.9% and non-water-market sales rose 11.7%. Domestic sales increased 46.3%; international sales rose 18.8%.
- Gross margin slipped to 25.1%, principally reflecting higher material costs and an $18.0 million non-cash LIFO expense, partly offset by improved labor and overhead leverage from higher volume.
- GAAP operating income included $7.1 million of acquisition costs, $1.4 million of acquired-inventory step-up amortization and $1.5 million of acquired backlog amortization. Excluding these items, management reported operating income of $50.2 million and a 9.6% margin.
- Interest expense rose to $19.2 million from zero, reflecting acquisition financing. Higher interest, acquisition costs and working-capital investment contributed to lower operating cash flow.
Debt, liquidity and capital allocation
- At year-end, cash was $6.8 million, compared with $125.2 million a year earlier. Gross debt was $448.3 million; debt net of unamortized discount and issuance fees was $436.8 million.
- The company had $78.5 million available under its $100 million revolving facility after borrowings and letters of credit. It reported compliance with debt covenants and believes available cash and borrowing capacity are adequate for at least the next 12 months.
- Debt includes a $350 million senior term loan facility, a $100 million revolving facility (with $17 million drawn at year-end) and a $90 million unsecured subordinated term loan. The senior facilities mature in May 2027 and the subordinated facility in December 2027. Borrowings are variable-rate; the company entered into swaps covering $170.6 million of notional amount.
- A 100-basis-point interest-rate increase was estimated to add about $2.8 million to annual interest expense. The company paid $17.9 million in dividends and repurchased $0.9 million of shares in 2022.
Outlook, risks and unusual items
- Management described its outlook as positive, citing record backlog and expected growth in most markets, particularly infrastructure. It expects 2023 gross margin to benefit from the full effect of 2022 pricing actions and a return of LIFO-related expense toward more normal levels.
- Backlog was $267.4 million at year-end, up 43.8% from $186.0 million. Approximately 89% was scheduled for shipment in 2023. Orders rose 30.6% for the year, or 11.2% excluding Fill-Rite.
- Planned 2023 capital expenditures are $18–$20 million, expected to be funded with internally generated cash; expected pension contributions are up to $2.3 million. Management expects a 2023 effective tax rate of 20%–22%.
- Key risks include acquisition integration and realization of Fill-Rite benefits, substantial debt and floating interest rates, inflation and supply-chain/material and labor costs, cyclical customer investment, competitive pricing, foreign exchange, cybersecurity, environmental and regulatory obligations, and impairment risk for goodwill and intangibles.
- Other notable items: the company recorded $6.4 million of non-cash pension settlement charges and $18.0 million of non-cash LIFO expense. Its $88.2 million LIFO reserve represents about $18.5 million in deferred taxes that could become payable if LIFO were repealed. Fill-Rite purchase accounting remained preliminary. Management and the auditor excluded Fill-Rite’s controls from the 2022 internal-control assessment; Fill-Rite represented about 61% of year-end assets and 17% of annual sales. The company reported effective controls for the assessed operations and received unqualified audit opinions on the financial statements and internal controls.
- Management said asbestos-related claims have not had, and are not expected to have based on current knowledge, a material effect; ordinary-course proceedings likewise were not expected to be material.
Investor verification checklist
- Assess Fill-Rite’s post-acquisition contribution, integration progress, final purchase-price allocation and the assumptions supporting expected benefits.
- Review debt balances, amortization schedule, covenant headroom, variable-rate exposure and the effectiveness and coverage of interest-rate swaps.
- Track cash conversion and working capital—especially receivables and inventory—against backlog growth and planned capital spending.
- Separate recurring operating performance from LIFO, pension settlement, acquisition and acquired-intangible charges; reconcile non-GAAP measures to GAAP.
- Monitor whether pricing offsets inflation and restores gross margin, and whether backlog converts to revenue on the stated schedule.
- Consider goodwill and intangible valuation sensitivity, including the preliminary Fill-Rite customer-relationship valuation and future impairment exposure.