GORMAN RUPP CO quarterly report, Q1 FY2023

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The Gorman-Rupp Company — Q1 2023 Form 10-Q

Reporting period: Three months ended March 31, 2023; comparisons are with Q1 2022 unless stated otherwise. Amounts are in U.S. dollars. The company designs and manufactures pumps and pump systems. Results include Fill-Rite, acquired May 31, 2022, so reported growth reflects the acquisition as well as underlying business performance.

Financial results

  • Sales: $160.5 million, up 57.1% from $102.2 million. Fill-Rite contributed $40.0 million. Excluding Fill-Rite, water-market sales increased 20.1% and non-water-market sales increased 12.8%.
  • Profit and margins: Gross profit was $45.5 million versus $25.5 million; gross margin rose to 28.4% from 25.0%. Operating income was $19.1 million versus $9.5 million, and operating margin improved to 11.9% from 9.3%.
  • Net income and EPS: Net income was $6.5 million, down 13.6% from $7.5 million; diluted earnings per share were $0.25 versus $0.29. The company reported adjusted EPS, a non-GAAP measure, of $0.27 versus $0.29, excluding acquired customer-backlog amortization.
  • Interest and taxes: Interest expense was $10.2 million, compared with none in Q1 2022, primarily reflecting debt used to finance Fill-Rite. The effective tax rate was 23.1%, versus 21.0%.
  • Cash flow: Operating cash flow was $18.6 million versus $6.2 million. Investing activities used $6.0 million, including $6.5 million of capital expenditures; financing activities used $7.0 million. Cash increased $5.4 million to $12.2 million. Company-defined non-GAAP free cash flow was $17.4 million versus $6.4 million.
  • Liquidity and debt: At March 31, cash was $12.2 million and gross debt was $446.9 million, including $17.5 million classified as current. The revolving facility had $78.1 million available after borrowings and letters of credit. Debt is principally variable-rate, with maturities in 2027; the company reported compliance with its debt covenants.
  • Balance sheet: Inventories were $116.8 million, up from $111.1 million at year-end 2022. Total liabilities were $553.6 million and equity was $331.4 million.

Changes, outlook, and risks

  • Sales growth and margin expansion reflected higher volumes, favorable labor and overhead leverage, and Fill-Rite. Gross-margin improvement was attributed to 270 basis points of labor and overhead leverage and 70 basis points of material-cost improvement. Higher acquired-intangible amortization and $10.2 million of interest expense contributed to lower net income despite higher operating income.
  • Backlog was $270.6 million, compared with $195.5 million at March 31, 2022 and $267.4 million at December 31, 2022. Management said substantially all remaining performance obligations were expected to convert to revenue within one year. Q1 incoming orders were $167.0 million, up 49.1% year over year, or 12.3% excluding Fill-Rite.
  • Management said inventory increased as planned to support orders and backlog and expected inventory to decline in the second half of 2023. The company is focused on sustained growth and improving margins; it did not provide specific sales or earnings guidance.
  • Planned 2023 capital expenditures were $18–$20 million, primarily for facilities and equipment. The board authorized a quarterly dividend of $0.175 per share, payable June 9, 2023, subject to shareholder eligibility and board discretion.
  • Interest-rate exposure remains material: a hypothetical 100-basis-point rate increase was estimated to raise annual interest expense by approximately $2.8 million. Interest-rate swaps covered $168.4 million of notional borrowings; their March 31 fair value was a $2.8 million payable.
  • Disclosed risks include acquisition integration and realization of expected benefits, debt service and variable interest rates, supply-chain and labor costs, competition, foreign exchange, goodwill and intangible-asset impairment, and pension and LIFO-related uncertainty. The Fill-Rite purchase-price allocation remained preliminary and could be revised. Management reported effective disclosure controls; integration of Fill-Rite’s internal controls was ongoing. No material change in reported legal proceedings was noted.

Important facts for investors to verify

  • Separate acquisition-driven growth from comparable organic growth, and assess Fill-Rite’s contribution and integration progress.
  • Track whether backlog converts to sales, and whether inventory declines as management expected in the second half of 2023.
  • Review debt amortization, interest-rate exposure, swap coverage, covenant headroom, and available revolving credit.
  • Monitor acquired-intangible amortization, the final purchase-price allocation, and potential goodwill or intangible impairment.
  • Distinguish reported operating cash flow from company-defined non-GAAP free cash flow, which deducts capital expenditures and dividends from adjusted earnings-based cash flow.