The Gorman-Rupp Company (NYSE: GRC) — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Unaudited consolidated results; amounts below are in millions except per-share data and percentages. Gorman-Rupp designs and manufactures pumps and pump systems for industrial, municipal, fire, construction, agriculture, petroleum, and other markets.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $167.5 | $153.8 | $498.9 | $375.0 |
| Gross profit / margin | $48.1 / 28.7% | $40.6 / 26.4% | $145.3 / 29.1% | $94.3 / 25.1% |
| Operating income / margin | $21.9 / 13.1% | $15.3 / 10.0% | $65.3 / 13.1% | $27.7 / 7.4% |
| Net income | $9.0 | $2.2 | $26.0 | $8.8 |
| Diluted earnings per share | $0.34 | $0.09 | $0.99 | $0.34 |
| Interest expense | $10.5 | $7.6 | $31.1 | $9.9 |
- Sales and earnings: Q3 sales rose 8.9%, operating income 42.9%, and net income 304.2% year over year. Nine-month sales rose 33.0%, operating income 135.8%, and net income 196.2%. The nine-month sales comparison includes nine months of Fill-Rite in 2023 versus four months in 2022, as well as higher volume and pricing.
- Margins: Gross margin expanded 230 basis points in Q3 and 400 basis points year to date. Management attributed improvement primarily to material-cost performance, price increases, and—in the year-to-date comparison—volume and mix leverage. Q3 labor and overhead included about 60 basis points of one-time costs from the Fill-Rite facility relocation.
- Cash flow: Nine-month operating cash flow was $71.7, compared with $12.5 in 2022. Investing used $16.3, including $16.9 of capital expenditures; financing used $43.4, principally for net debt repayments and dividends. Cash increased $11.4 to $18.2. The comparable 2022 investing outflow included $526.3 for the Fill-Rite acquisition.
- Balance sheet and liquidity: At September 30, cash was $18.2, current assets $233.1, and current liabilities $102.4. Total debt outstanding was $420.1, including $19.7 current; debt net of unamortized discount and fees was $410.2. Revolver availability was $96.3 after borrowings and letters of credit. Management said liquidity was adequate for at least the next 12 months; the company reported compliance with debt covenants.
- Capital returns: Dividends paid were $0.175 per share quarterly ($0.525 year to date). The board authorized a $0.18 quarterly dividend payable in December 2023. The $50.0 million share-repurchase authorization had $48.1 available; no shares were repurchased under the public program in Q3.
Material changes and unusual items
- The May 2022 Fill-Rite acquisition materially affects year-over-year comparisons. The nine-month sales increase reflects the longer inclusion period; the acquired business also increased amortization and debt-related interest costs.
- Interest expense rose substantially, primarily due to higher interest rates and a longer comparison period with acquisition-related debt. In Q3, interest expense increased 38.6% year over year.
- 2022 results included noncash pension settlement charges of $4.8 in Q3 and $6.4 for nine months, plus $7.0 of acquisition costs and $1.4 of inventory step-up amortization in the nine-month period. These items did not recur on the same basis in 2023. Management’s non-GAAP adjusted EPS was $0.34 versus $0.25 for Q3 and $1.02 versus $0.81 year to date; these measures exclude specified items and are not substitutes for GAAP results.
- Backlog was $237.5 at September 30, down from $266.7 a year earlier and $267.4 at December 31, 2022. Nine-month incoming orders increased 6.9% year over year. The company expects substantially all remaining performance obligations to be recognized as revenue within one year.
- A new Lenexa, Kansas operating lease began in June, with a term through August 2043 and approximately $17.5 each in right-of-use assets and long-term lease liabilities at quarter-end. Management said the income-statement impact was not material.
Outlook, risks, and other disclosures
- Management described backlog as lower than earlier-year record levels but still elevated, and said it remained optimistic about the outlook. No specific revenue or earnings guidance was provided. Planned full-year 2023 capital expenditures were approximately $20, primarily for equipment and building improvements, expected to be funded internally.
- The expanded Fill-Rite Lenexa facility is nearly three times the size of the prior facility and is intended to support growth. The company said it was integrating Fill-Rite internal controls; disclosure controls and procedures were assessed as effective at September 30.
- Key stated risks include economic and supply-chain conditions, raw-material and labor availability and costs, acquisition integration and realization of anticipated benefits, ability to service and repay debt, variable interest rates, competition, foreign-exchange exposure, cybersecurity, environmental and regulatory costs, and possible impairment of goodwill or intangible assets.
- Debt includes variable-rate borrowings; interest-rate swaps covered $164.1 of senior term debt, with a 4.1% average fixed rate and terms extending to May 2027. The company estimated a 100-basis-point rate increase would raise annual interest expense by about $2.6.
- No material changes to previously reported legal proceedings were disclosed. The filing reports no defaults on senior securities and no director or officer adoption or termination of a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during the quarter.
Important facts for investors to verify
- How much of sales and order growth reflects underlying demand and pricing versus the changing Fill-Rite comparison period; monitor backlog conversion and cancellations.
- Whether gross-margin gains persist after pricing, material-cost and LIFO effects, and whether facility relocation costs or other operating expenses continue.
- Debt reduction, cash generation, interest costs, swap coverage, covenant headroom, and the company’s ability to meet debt maturities and obligations.
- The composition and sustainability of management’s adjusted EPS measures, including the treatment of LIFO and acquisition-related amortization.
- Execution and capacity benefits from the Lenexa expansion, alongside acquisition integration and control remediation.