Gorman-Rupp Company — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. The company designs and manufactures pumps and pump systems for water, industrial, petroleum, fire protection, and other markets. Financial statements are unaudited.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $153.8 million | $102.1 million | $375.0 million | $284.2 million |
| Gross margin | 26.4% | 25.3% | 25.1% | 25.9% |
| Operating income | $15.3 million | $11.5 million | $27.7 million | $31.1 million |
| Operating margin | 10.0% | 11.3% | 7.4% | 11.0% |
| Net income | $2.2 million | $8.8 million | $8.8 million | $23.3 million |
| Diluted earnings per share | $0.09 | $0.34 | $0.34 | $0.89 |
- Q3 sales rose 50.6%, including $40.1 million from Fill-Rite, acquired May 31, 2022. Excluding Fill-Rite, sales increased in water and non-water markets, according to management.
- Nine-month sales increased 32.0%, including $53.7 million of Fill-Rite sales from the acquisition date. Excluding Fill-Rite, management reported growth across most water and non-water markets.
- Q3 gross margin improved 110 basis points, mainly from production volume and labor/overhead leverage, partly offset by higher material costs. Nine-month gross margin fell 80 basis points, including unfavorable LIFO and acquisition-related inventory and backlog amortization effects.
- Profitability was pressured by acquisition-related amortization and costs, higher interest expense, and pension settlement charges. Q3 other expense included a $4.8 million non-cash pension settlement charge; the nine-month charge was $6.4 million.
Cash flow, debt, and liquidity
- For the nine months, operating cash flow was $12.5 million, versus $41.5 million in 2021. The filing cites interest and acquisition costs, higher receivables and inventory, and lower deferred revenue/customer deposits as factors.
- Investing cash outflow was $537.2 million, primarily the $526.3 million Fill-Rite purchase and $11.3 million of capital expenditures. Financing cash inflow was $411.1 million, mainly new borrowings, partially offset by debt fees, dividends, and other payments.
- Cash was $10.3 million at September 30, down from $125.2 million at year-end 2021. The company reported $93.1 million available on its $100 million revolving facility after borrowings and letters of credit.
- Debt totaled $440.6 million gross, or $428.6 million net of unamortized discount and issuance fees; $17.5 million was current and $411.1 million was long-term net debt. The new acquisition financing includes variable-rate senior and subordinated facilities.
- The company reported $50.4 million in adjusted EBITDA and $25.9 million in company-defined free cash flow for the nine months. These are non-GAAP measures; the company’s free cash flow calculation subtracts capital expenditures and dividends from adjusted EBITDA.
- Management said it was in compliance with debt covenants and believed liquidity was adequate for the next 12 months. A 100-basis-point rate increase was estimated to raise annual interest expense by about $2.7 million.
Acquisition, outlook, and risks
- Fill-Rite was acquired for $526.3 million in cash, funded with new debt and cash on hand. Preliminary purchase accounting added substantial goodwill and intangible assets; estimates may change as valuations are finalized. The acquisition generated $7.0 million in one-time costs during the first nine months.
- Backlog was $266.7 million at September 30, versus $156.5 million a year earlier and $186.0 million at December 31, 2021. Management expects to recognize substantially all remaining performance obligations within one year.
- Management expects further gross-margin improvement as pricing actions take effect and fixed-cost leverage continues. It described the company as well positioned for Q4 and 2023, citing backlog, Fill-Rite integration, and anticipated synergies. Planned 2022 capital expenditures were $15–$18 million. No quantified earnings or sales guidance was provided.
- Risks highlighted include supply-chain constraints, inflation and material costs, acquisition integration and synergy realization, customer/supplier and employee retention, variable-rate debt and ability to service or refinance borrowings, covenant compliance, and potential impairment of goodwill or intangible assets. Management also identified foreign exchange, cybersecurity, competition, and pension settlement expense risks.
- The Board authorized a quarterly dividend of $0.175 per share, payable in December 2022, subject to Board discretion. The company had $48.1 million remaining under its share repurchase authorization and made no repurchases in Q3.
Most important facts for investors to verify
- Whether Fill-Rite integration, growth, and expected synergies progress as anticipated, and whether the preliminary purchase price allocation changes materially.
- Debt reduction, interest-rate exposure, covenant headroom, and continuing access to revolving credit after the acquisition.
- Whether working-capital needs and operating cash flow improve, given the reported increases in receivables and inventory and the decline in cash.
- Whether pricing and volume gains offset LIFO, material-cost, amortization, and other margin pressures.
- The sustainability of reported and adjusted earnings: the filing’s adjusted measures exclude selected pension, acquisition, and amortization items and are not substitutes for GAAP results.