Gorman-Rupp Company — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. The company designs, manufactures, and markets pumps and pump systems. Financial statements are unaudited.
Financial results and liquidity
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net sales | $102.2 million | $89.0 million | +14.8% |
| Gross profit / margin | $25.5 million / 25.0% | $23.0 million / 25.9% | Margin down 0.9 percentage points |
| Operating income / margin | $9.5 million / 9.3% | $9.0 million / 10.1% | Income +5.4%; margin down 0.8 points |
| Net income | $7.5 million | $7.4 million | +1.5% |
| Diluted earnings per share | $0.29 | $0.28 | +$0.01 |
| Operating cash flow | $6.2 million | $13.7 million | Down $7.5 million |
| Capital expenditures | $3.5 million | $0.9 million | Up $2.6 million |
| Non-GAAP free cash flow | $4.6 million | $7.4 million | Down $2.8 million |
At March 31, cash and cash equivalents were $122.7 million, total assets $431.3 million, and total liabilities $98.1 million. The company reported no bank debt and had $24.3 million available under bank lines after $5.2 million of letters of credit. Working capital increased, including receivables to $67.7 million and inventories to $90.0 million. Cash dividends were $0.17 per share; the company repurchased 24,546 shares for approximately $0.9 million.
Material changes and operating trends
- Sales increased in domestic and international markets, by 15.6% and 12.8%, respectively. Pumps and pump systems generated $85.8 million of sales; repair parts and other sales were $16.4 million.
- Incoming orders rose 9.6% to $112.0 million. Backlog was $195.5 million, compared with $125.5 million a year earlier and $186.0 million at year-end 2021; substantially all remaining performance obligations were expected to be recognized within one year.
- Gross margin declined as material costs rose, including a 100-basis-point unfavorable LIFO impact. Labor and overhead leverage from higher volume partly offset the pressure. The reported LIFO impact on earnings per share was unfavorable by $0.05, versus $0.02 in Q1 2021.
- Operating cash flow fell primarily due to higher accounts receivable and inventory associated with increased sales and backlog. Management-defined non-GAAP free cash flow deducts capital expenditures and dividends from adjusted EBITDA.
Outlook, risks, and unusual items
- Management reported positive order trends and sales growth across most markets, but expects global supply-chain challenges and material-cost inflation to persist. It plans to adjust pricing to help offset cost increases and expects to maintain top-line growth; no specific full-year revenue or earnings guidance was provided.
- Planned 2022 capital expenditures were $15–$20 million, expected to be funded from internally generated funds.
- On April 26, 2022, the company agreed to acquire Fill-Rite and Sotera assets for $525 million, with approximately $80 million of expected tax benefits and an estimated net transaction value of $445 million. Closing was expected in Q2 2022, subject to customary conditions and regulatory approvals. Funding was expected to combine cash and new debt, including proposed $350 million term, $100 million revolving, and $90 million subordinated facilities.
- The acquisition could substantially increase indebtedness and carries financing, integration, regulatory, customer and supplier retention, and synergy risks. Other cited uncertainties include COVID-19, supply and labor costs, competition, foreign exchange, cybersecurity, environmental obligations, and pension and goodwill risks.
- Management stated disclosure controls were effective at March 31, 2022; there were no material changes in internal control or material changes to previously reported legal proceedings.
Investor verification points
- Verify the acquisition’s closing, final funding and debt terms, tax benefits, and subsequent integration and performance.
- Track whether backlog converts to revenue as expected and whether order growth continues amid supply constraints.
- Monitor material-cost inflation, pricing recovery, LIFO effects, and gross and operating margins.
- Assess working-capital requirements and operating cash conversion, given the year-over-year decline in operating cash flow.
- Review debt levels, covenant compliance, liquidity, and dividend capacity after the anticipated acquisition financing.