Business context and reporting period
The Gorman-Rupp Company designs, manufactures and markets pumps and pump systems. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2022, compared with the same 2021 periods. On May 31, 2022, the company acquired Fill-Rite and Sotera, a division of Tuthill Corporation; its results are included from the acquisition date.
Key financial results
Amounts are in millions of dollars except per-share data and percentages.
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $119.1 | $93.0 | $221.2 | $182.0 |
| Gross profit / margin | $28.2 / 23.7% | $24.7 / 26.5% | $53.7 / 24.3% | $47.7 / 26.2% |
| Operating income / margin | $2.9 / 2.4% | $10.6 / 11.4% | $12.4 / 5.6% | $19.6 / 10.8% |
| Net income (loss) | $(1.0) | $7.1 | $6.5 | $14.5 |
| Diluted earnings (loss) per share | $(0.04) | $0.27 | $0.25 | $0.56 |
- Sales rose 28.0% in Q2 and 21.5% in the first half. Management reported first-half organic sales growth across water and non-water markets, excluding Fill-Rite.
- Q2 adjusted EPS, a non-GAAP measure, was $0.27 versus $0.32; first-half adjusted EPS was $0.56 versus $0.61. Adjusted EBITDA was $15.4 million in Q2 versus $13.6 million and $27.9 million for the first half versus $25.9 million.
- Q2 GAAP results included $6.9 million in acquisition costs, $1.4 million of acquired-inventory step-up amortization, and $0.2 million of acquired backlog amortization. The full inventory step-up was recognized in the period; backlog amortization is expected within one year.
- Gross margin contracted 280 basis points in Q2 and 190 basis points year to date. Management cited higher material costs, including unfavorable LIFO impacts, partly offset by improved labor and overhead leverage from higher volume.
- First-half operating cash flow was $6.7 million, down from $28.1 million. Capital expenditures were $8.4 million; reported free cash flow, a company-defined non-GAAP measure after dividends, was $10.6 million versus $14.3 million.
- Cash was $16.8 million at June 30, down from $125.2 million at year-end. Gross debt was $445.0 million ($432.4 million net of unamortized discount and issuance costs); $17.5 million was current. The company reported $92.4 million of available revolver capacity after borrowings and letters of credit.
- Backlog was $264.7 million, versus $153.0 million a year earlier and $186.0 million at December 31, 2021; substantially all remaining performance obligations were expected to be recognized as revenue within one year.
Material changes and transaction
The $526.3 million Fill-Rite acquisition was funded with $350.0 million of senior term debt, $90.0 million of subordinated debt, $5.0 million drawn on the revolver and $81.3 million of cash. The company cited approximately $80.0 million in expected tax benefits, describing net transaction value as approximately $446.3 million. Preliminary purchase accounting recorded $228.7 million of goodwill and $240.7 million of finite-lived acquired intangible assets; valuations remain subject to finalization. Acquisition-related costs were expensed as incurred.
The acquisition materially increased leverage and interest expense: Q2 interest expense was $2.3 million versus none in the prior-year quarter. The new facilities carry variable rates; at June 30, the senior facilities were priced at adjusted Term SOFR plus 2.75%, and subordinated debt at adjusted Term SOFR plus 9.0%. The senior facilities mature in 2027; the subordinated facility matures in December 2027. The company said it was compliant with debt covenants at June 30.
Outlook, risks and other items
- No specific revenue or earnings guidance was provided. Management expressed optimism based on strong orders, quality backlog and pricing actions to mitigate inflation, while expecting global supply-chain challenges to persist. It plans to focus on Fill-Rite integration and profitable growth.
- Full-year 2022 capital expenditures were estimated at $15 million to $20 million, primarily for machinery and equipment, expected to be funded internally. Management said it believed liquidity was adequate for its strategy and obligations over the next 12 months.
- The board authorized a $0.17 quarterly dividend payable September 9, 2022. Future dividends remain at the board’s discretion. The company had $48.1 million remaining under its $50 million share-repurchase authorization and made no repurchases in Q2.
- Risks highlighted include supply availability and cost, inflation, variable-rate borrowing costs, ability to service and repay debt, covenant compliance, Fill-Rite integration and realization of expected benefits, customer and supplier retention, and potential impairment of goodwill and other intangibles. The filing reported no material change in previously disclosed legal proceedings.
- Management stated disclosure controls were effective as of June 30, 2022; integration of Fill-Rite’s internal controls was in progress. The filing cautions that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Final Fill-Rite purchase-price allocation, expected tax benefits, integration progress and whether anticipated growth or synergies are realized.
- Debt service capacity, variable-rate exposure, covenant headroom and the impact of required amortization and future maturities.
- Whether margins recover as acquisition-related inventory charges roll off, and how material costs, LIFO effects, pricing and supply constraints develop.
- Conversion of the elevated backlog into revenue and cash, including the effects of working-capital needs and order timing.
- Reconciliation and comparability of management’s non-GAAP adjusted EPS, adjusted EBITDA and free-cash-flow measures with GAAP results.