Gorman-Rupp Company (NYSE: GRC) — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Unaudited consolidated financial statements; dollar amounts below are in millions unless otherwise noted.
Business context and financial performance
Gorman-Rupp designs and manufactures pumps and pump systems for diverse industrial, municipal, fire, construction, agricultural, petroleum and other markets. Results include Fill-Rite, acquired May 31, 2022, so year-over-year comparisons are affected by the partial-period contribution in 2022.
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $171.0 | $119.1 | $331.5 | $221.2 |
| Gross profit / margin | $51.7 / 30.2% | $28.2 / 23.7% | $97.2 / 29.3% | $53.7 / 24.3% |
| Operating income / margin | $24.3 / 14.2% | $2.9 / 2.4% | $43.4 / 13.1% | $12.4 / 5.6% |
| Interest expense | $10.5 | $2.3 | $20.7 | $2.3 |
| Net income (loss) | $10.5 | ($1.0) | $17.0 | $6.5 |
| Diluted earnings (loss) per share | $0.40 | ($0.04) | $0.65 | $0.25 |
| Operating cash flow | Not separately provided for quarter | $37.9 | $6.7 |
Q2 sales increased 43.6%; excluding Fill-Rite, sales rose 21.4%. For the six-month period, sales increased 49.8%; excluding Fill-Rite, they rose 19.7%. Management attributed underlying growth to higher volume and pricing, with gains across most end markets; agriculture sales declined modestly. The company reported non-GAAP adjusted EPS of $0.41 for Q2 and $0.68 for the first half, versus $0.27 and $0.56, respectively, in 2022.
Gross-margin expansion reflected better labor and overhead absorption, pricing, lower LIFO expense and the nonrecurrence of Fill-Rite inventory step-up costs recorded in 2022. Management said Q2 2023 operating margin was 480 basis points higher than the comparable 2022 margin after excluding 2022 acquisition costs and inventory step-up; the corresponding first-half increase was 370 basis points. These comparisons and adjusted EPS are management-presented non-GAAP measures, not substitutes for GAAP results.
Cash flow, liquidity and debt
- Cash and cash equivalents were $12.2 at June 30, 2023, versus $6.8 at December 31, 2022. Operating cash flow of $37.9 less capital additions of $13.3 implies approximately $24.6 of operating cash flow after capital additions for the first half.
- Total debt outstanding was $439.5, compared with $448.3 at year-end; balance-sheet debt net of unamortized discount and issuance costs was $428.9. The debt includes a $332.5 senior term loan, $17.0 drawn on the revolving facility and $90.0 subordinated debt.
- The company reported $80.9 available under its $100 million revolving facility after borrowings and letters of credit. It stated liquidity was adequate for its strategy and obligations for at least the next 12 months.
- Senior and subordinated facilities mature in 2027. Borrowings are substantially variable-rate; interest-rate swaps had a $166.3 notional amount and a 4.1% average fixed rate. Management estimated a 100-basis-point rate increase would raise annual interest expense by about $2.7.
- All debt covenants were met at June 30. A June 30 amendment eased the minimum fixed-charge coverage requirement to 1.00x for four-quarter periods through June 2024, then 1.10x for periods ending September through December 2024. Management said the company also met the pre-amendment requirements at June 30.
Material changes, outlook and risks
- Fill-Rite contributed $42.9 of Q2 sales and $82.8 for the first half of 2023; comparable 2022 periods included only $13.5 from the May 31 acquisition date. The acquisition was funded with substantial new debt and increased amortization and interest costs.
- Backlog was $249.8 at June 30, down from $264.7 a year earlier and $267.4 at December 31, 2022. Incoming orders for the first half were $321.0, up 12.0% including Fill-Rite but down 13.8% excluding it. The company expects substantially all remaining performance obligations to convert to revenue within one year.
- Management said backlog remains elevated and supports the rest of the year, expects inventory to decline in the second half and improve cash flow, and remains focused on sustained growth and reducing debt leverage. No quantified full-year revenue or earnings guidance is provided in the filing. Planned 2023 capital expenditures were $18–$20.
- Risks highlighted include economic and supply-chain conditions, raw-material and labor costs, acquisition integration and realization of expected benefits, debt service and interest rates, goodwill and intangible-asset impairment, LIFO inventory accounting, foreign exchange, competition, cybersecurity and regulatory or environmental costs.
- Unusual and other notable items: 2022 comparisons included $6.9 of acquisition costs and $1.4 of acquired-inventory step-up amortization; 2022 also included a $1.6 pension settlement loss. A new Lenexa manufacturing-facility operating lease began in June 2023, creating approximately $17.5 of right-of-use assets and lease liabilities. Management reported no material change in legal proceedings and said disclosure controls were effective.
Important facts for investors to verify
- Separate organic performance from Fill-Rite’s contribution and assess whether order trends and backlog convert into sales as expected.
- Track gross-margin durability, including pricing, volume and mix, LIFO effects, and the nonrecurrence of acquisition-related inventory costs.
- Monitor cash generation, inventory levels, debt reduction, variable-rate borrowing costs, swap coverage and compliance with amended covenants.
- Review the calculation and exclusions in non-GAAP adjusted EPS and EBITDA measures alongside GAAP results.
- Assess the execution of Fill-Rite integration and whether management’s outlook assumptions hold; interim results are not necessarily indicative of full-year performance.