# Gorman Rupp Co: Form 10-Q for the period ended Sep 30, 2022

- Company: [Gorman Rupp Co](/companies/grc.md) (CIK 42682)
- Form: 10-Q
- Filed: 2022-10-31
- Accepted by EDGAR: Oct 31, 2022, 15:30 ET
- Period: 2022-09-30
- Accession: 0001437749-22-025154
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/42682/000143774922025154/grc20220930_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/42682/000143774922025154/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2022-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2022-07-01 to 2022-09-30 | $153.8m | us-gaap:RevenueFromContractWithCustomerIncludingAssessedTax |
| Revenue | 9 months, 2022-01-01 to 2022-09-30 | $375.0m | us-gaap:RevenueFromContractWithCustomerIncludingAssessedTax |
| Cost of revenue | 3 months, 2022-07-01 to 2022-09-30 | $113.2m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2022-01-01 to 2022-09-30 | $280.7m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2022-07-01 to 2022-09-30 | $40.6m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2022-01-01 to 2022-09-30 | $94.3m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2022-07-01 to 2022-09-30 | $22.1m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2022-01-01 to 2022-09-30 | $62.1m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2022-07-01 to 2022-09-30 | $15.3m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2022-01-01 to 2022-09-30 | $27.7m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2022-07-01 to 2022-09-30 | $7.6m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2022-01-01 to 2022-09-30 | $9.9m | us-gaap:InterestExpense |
| Income tax | 3 months, 2022-07-01 to 2022-09-30 | $211.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2022-01-01 to 2022-09-30 | $2.0m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2022-07-01 to 2022-09-30 | $2.2m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2022-01-01 to 2022-09-30 | $8.8m | us-gaap:NetIncomeLoss |
| Basic EPS | 3 months, 2022-07-01 to 2022-09-30 | $0.09 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2022-01-01 to 2022-09-30 | $0.34 | us-gaap:EarningsPerShareBasic |
| Operating cash flow | 9 months, 2022-01-01 to 2022-09-30 | $12.5m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2022-01-01 to 2022-09-30 | $11.3m | us-gaap:PaymentsToAcquireProductiveAssets |
| Cash and equivalents | at 2022-09-30 | $10.3m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2022-09-30 | $225.6m | us-gaap:AssetsCurrent |
| Total assets | at 2022-09-30 | $870.8m | us-gaap:Assets |
| Current liabilities | at 2022-09-30 | $94.9m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2022-09-30 | $543.8m | us-gaap:Liabilities |
| Long-term debt | at 2022-09-30 | $411.1m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2022-09-30 | $17.5m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2022-09-30 | $327.0m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 31,003 characters.

### (Dollars in thousands, except for per share amounts)

The following discussion and analysis of the Company’s financial condition and Results of Operations should be read in conjunction with the Consolidated Financial Statements, and notes thereto, and the other financial data included elsewhere in this Quarterly Report on Form 10-Q. The following discussion should also be read in conjunction with the Company’s audited Consolidated Financial Statements and accompanying notes, and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in its Annual Report on Form 10-K for the year ended December 31, 2021. The coronavirus (COVID-19) pandemic had an adverse effect on the Company’s reported results in 2021 and while our supply chains continue to face challenges, our reported results have continued to improve. The extent to which the Company’s operations will continue to be impacted by the pandemic will depend largely on future developments, which are highly uncertain and cannot be accurately predicted, including new information which may emerge concerning the severity of the pandemic and actions by government authorities to contain the pandemic or treat its impact, among other things.

### Executive Overview

On May 31, 2022, the Company completed its acquisition of Fill-Rite and Sotera (“Fill-Rite”), a division of Tuthill Corporation, for $526.3 million. When adjusted for approximately $80.0 million in expected tax benefits, the net acquisition value is approximately $446.3 million. The Company funded the acquisition with cash on-hand and new debt. The Company incurred $7.0 million of one-time acquisition costs during the nine months ended September 30, 2022 and does not expect to incur material acquisition costs going forward. The results of operations for Fill-Rite from the acquisition date are included in the Company’s Consolidated Statements of Income for the three and nine months ended September 30, 2022.

The following discussion of Results of Operations includes certain non-GAAP financial data and measures such as (1) adjusted earnings per share, which is earnings per share excluding non-cash pension settlement charges per share, one-time acquisition costs per share, amortization of step-up in value of acquired inventories per share and amortization of customer backlog per share and (2) adjusted earnings before interest, taxes, depreciation and amortization, which is net income (loss) excluding interest, taxes, depreciation and amortization, adjusted to exclude non-cash pension settlement charges, one-time acquisition costs, amortization of step up in value of acquired inventories, and amortization of customer backlog. Management utilizes these adjusted financial data and measures to assess comparative operations against those of prior periods without the distortion of non-comparable factors. The inclusion of these adjusted measures should not be construed as an indication that the Company’s future results will be unaffected by unusual or infrequent items or that the items for which the Company has made adjustments are unusual or infrequent or will not recur. The Company believes that these non-GAAP financial data and measures also will be useful to investors in assessing the strength of the Company’s underlying operations from period to period. These non-GAAP financial measures are not intended to replace GAAP financial measures, and they are not necessarily standardized or comparable to similarly titled measures used by other companies. Provided below is a reconciliation of adjusted earnings per share and adjusted earnings before interest, taxes, depreciation and amortization.

| Adjusted earnings per share: | Three Months Ended September 30, 2022 | 2021 | Nine Months Ended September 30, 2022 | 2021 |
| --- | ---: | ---: | ---: | ---: |
| Reported earnings per share – GAAP basis | $0.09 | $0.34 | $0.34 | $0.89 |
| Plus pension settlement charge | 0.14 | 0.01 | 0.19 | 0.06 |
| Plus one-time acquisition costs | - | - | 0.21 | - |
| Plus amortization of step up in value of acquired inventories | - | - | 0.04 | - |
| Plus amortization of acquired customer backlog | 0.02 | - | 0.03 | - |
| Non-GAAP adjusted earnings per share | $0.25 | $0.35 | $0.81 | $0.95 |
| **Adjusted earnings before interest, taxes, depreciation and amortization:** |  |  |  |  |
| Reported net income–GAAP basis | $2,221 | $8,782 | $8,768 | $23,308 |
| Plus interest expense | 7,556 | - | 9,878 | - |
| Plus provision for income taxes | 211 | 2,274 | 1,951 | 5,974 |
| Plus depreciation and amortization | 6,960 | 2,957 | 14,161 | 8,908 |
| Non-GAAP earnings before interest, taxes, depreciation and amortization | 16,948 | 14,013 | 34,758 | 38,190 |
| Plus pension settlement charge | 4,759 | 388 | 6,355 | 2,116 |
| Plus one-time acquisition costs | 154 | - | 7,048 | - |
| Plus amortization of step up in value of acquired inventories | - | - | 1,406 | - |
| Plus amortization of acquired customer backlog | 651 | - | 868 | - |
| Non-GAAP adjusted earnings before interest, taxes, depreciation and amortization | $22,512 | $14,401 | $50,435 | $40,306 |

15

The Gorman-Rupp Company (“we”, “our”, “Gorman-Rupp” or the “Company”) is a leading designer, manufacturer and international marketer of pumps and pump systems for use in diverse water, wastewater, construction, dewatering, industrial, petroleum, original equipment, agriculture, fire protection, heating, ventilating and air conditioning (HVAC), military and other liquid-handling applications. The Company attributes its success to long-term product quality, applications and performance combined with timely delivery and service, and continually seeks to develop initiatives to improve performance in these key areas.

We regularly invest in training for our employees, in new product development and in modern manufacturing equipment, technology and facilities all designed to increase production efficiency and capacity and drive growth by delivering innovative solutions to our customers. We believe that the diversity of our markets is a major contributor to the generally stable financial growth we have produced historically.

As a result of the Fill-Rite acquisition, the Company’s cash position decreased $114.9 million during the first nine months of 2022 to $10.3 million. The Company generated $50.4 million in adjusted earnings before interest, taxes, depreciation and amortization during the same period.

Capital expenditures for the first nine months of 2022 were $11.3 million and consisted primarily of machinery and equipment. Capital expenditures for the full-year 2022 are presently planned to be in the range of $15-$18 million primarily for machinery and equipment purchases, and are expected to be financed through internally-generated funds.

The Company’s backlog of orders was $266.7 million at September 30, 2022 compared to $156.5 million at September 30, 2021 and $186.0 million at December 31, 2021. Fill-Rite added $14.6 million to the backlog at September 30, 2022. Incoming orders during the third quarter of 2022 increased 50.2% when compared to the same period last year, and 10.4% excluding Fill-Rite. Incoming orders increased 35.5% for the first nine months of 2022 compared to the same period in 2021, and 18.7% excluding Fill-Rite. The increase in backlog for the first nine months of 2022 was primarily driven by strong incoming orders during the first nine months, large municipal orders which are longer term in nature, and the acquisition of Fill-Rite. The backlog aging has remained consistent with historical levels.

On October 27, 2022, the Board of Directors authorized the payment of a quarterly dividend of $0.175 per share on the common stock of the Company, payable December 9, 2022, to shareholders of record as of November 15, 2022. This will mark the 291st consecutive quarterly dividend paid by The Gorman-Rupp Company.

The Company currently expects to continue its exceptional history of paying regular quarterly dividends and increased annual dividends. However, any future dividends will be reviewed individually and declared by our Board of Directors at its discretion, dependent on our assessment of the Company’s financial condition and business outlook at the applicable time.

### Outlook

The Company looks for additional improvement in gross margin as the pricing actions that have taken place during the year are realized and leverage on fixed costs continues. The Company is well positioned for both the fourth quarter and 2023 with strong backlog and continued integration and synergies from Fill-Rite.

### Three Months Ended September 30, 2022 vs. Three Months Ended September 30, 2021

### Net Sales

|  | Three Months Ended September 30, 2022 | 2021 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Net Sales | $153,792 | $102,110 | $51,682 | 50.6% |

Net sales for the third quarter of 2022 were $153.8 million compared to net sales of $102.1 million for the third quarter of 2021, an increase of 50.6% or $51.7 million. Domestic sales increased 68.0% or $46.8 million and international sales increased 14.8% or $4.9 million compared to the same period in 2021. Fill-Rite sales, which are primarily domestic, were $40.1 million for the third quarter of 2022.

Excluding Fill-Rite, sales in our water markets increased 12.2% or $9.0 million in the third quarter of 2022 compared to the third quarter of 2021. Sales increased $6.2 million in the municipal market, $1.6 million in the fire protection market, $1.5 million in the repair market, and $0.5 million in the construction market. Partially offsetting these increases was a sales decrease of $0.8 million in the agriculture market.

Excluding Fill-Rite, sales in our non-water markets increased 9.0% or $2.6 million in the third quarter of 2022 compared to the third quarter of 2021. Sales increased $4.1 million in the industrial market. Partially offsetting this increase were sales decreases of $0.8 million in the OEM market and $0.7 million in the petroleum market.

### Cost of Products Sold and Gross Profit

|  | Three Months Ended September 30, 2022 | 2021 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Cost of products sold | $113,229 | $76,277 | $36,952 | 48.4% |
| % of Net sales | 73.6% | 74.7% |  |  |
| Gross Margin | 26.4% | 25.3% |  |  |

Gross profit was $40.6 million for the third quarter of 2022, resulting in gross margin of 26.4%, compared to gross profit of $25.8 million and gross margin of 25.3% for the same period in 2021. The improvement in gross margin was due primarily to leverage from increased sales volume and sales mix which includes a full quarter of Fill-Rite results. The 110 basis point increase in gross margin was driven by a 250 basis point improvement from labor and overhead leverage due to increased sales volume. The increase was partially offset by a 140 basis point increase in cost of material, which included an unfavorable impact of 40 basis points related to the amortization of acquired Fill-Rite customer backlog. The Fill-Rite customer backlog will be amortized within the next three quarters.

### Selling, General and Administrative (SG&A) Expenses

|  | Three Months Ended September 30, 2022 | 2021 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Selling, general and administrative expenses | $22,076 | $14,173 | $7,903 | 55.8% |
| % of Net sales | 14.4% | 13.9% |  |  |

Selling, general and administrative (“SG&A”) expenses were $22.1 million and 14.4% of net sales for the third quarter of 2022 compared to $14.2 million and 13.9% of net sales for the same period in 2021. The increase in SG&A expenses and as a percentage of sales is primarily due to a $6.4 million increase in SG&A expenses related to a full quarter of Fill-Rite results.

### Amortization Expense

|  | Three Months Ended September 30, 2022 | 2021 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Amortization expense | $3,176 | $118 | $3,058 | 2,591.5% |
| % of Net sales | 2.1% | 0.1% |  |  |

Amortization expense was $3.2 million for the third quarter of 2022 compared to $0.1 million for the same period in 2021. The increase in amortization expense was due to $3.0 million in amortization attributable to the Fill-Rite acquisition.

### Operating Income

|  | Three Months Ended September 30, 2022 | 2021 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Operating income | $15,311 | $11,542 | $3,769 | 32.7% |
| % of Net sales | 10.0% | 11.3% |  |  |

Operating income was $15.3 million for the third quarter of 2022, resulting in an operating margin of 10.0%, compared to operating income of $11.5 million and operating margin of 11.3% for the same period in 2021. Operating margin decreased 130 basis points primarily due to increased amortization expense, increase in cost of material, and increased SG&A, but was partially offset by improvement from labor and overhead leverage.

### Other Income (Expense), net

|  | Three Months Ended September 30, 2022 | 2021 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Other income (expense), net | $(5,323) | $(486) | $(4,837) | (995.3)% |
| % of Net sales | 3.5% | 0.5% |  |  |

Other income (expense), net was $5.3 million of expense for the third quarter of 2022 compared to expense of $0.5 million for the same period in 2021. The increase in expense was due primarily to increased non-cash pension settlement charges of $4.8 million in the third quarter of 2022 compared to $0.4 million in the third quarter of 2021. The pension settlement charge is the result of retirees who elect the lump sum payment upon retirement.

### Net Income

|  | Three Months Ended September 30, 2022 | 2021 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Income before income taxes | $2,432 | $11,056 | $(8,624) | (78.0)% |
| % of Net sales | 1.6% | 10.8% |  |  |
| Income taxes | $211 | $2,274 | $(2,063) | (90.7)% |
| Effective tax rate | 8.7% | 20.6% |  |  |
| Net income | $2,221 | $8,782 | $(6,561) | (74.7)% |
| % of Net sales | 1.4% | 8.6% |  |  |
| Earnings per share | $0.09 | $0.34 | $(0.25) | (73.5)% |

The Company’s effective tax rate was 8.7% for the third quarter of 2022 compared to 20.6% for the third quarter of 2021.

Net income was $2.2 million, or $0.09 per share, for the third quarter of 2022 compared to net income of $8.8 million in the third quarter of 2021, or $0.34 per share. Adjusted earnings per share for the third quarter of 2022 were $0.25 per share compared to $0.35 per share for the third quarter of 2021. Adjusted earnings per share for the third quarter of 2022 included an unfavorable LIFO impact of $0.11 per share compared to an unfavorable LIFO impact of $0.08 per share in the third quarter of 2021. Adjusted earnings also included incremental non-cash amortization expense related to Fill-Rite of $0.09 per share.

### Nine Months Ended September 30, 2022 vs. Nine Months Ended September 30, 2021

### Net Sales

|  | Nine Months Ended September 30, 2022 | 2021 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Net Sales | $375,026 | $284,152 | $90,874 | 32.0% |

Net sales for the first nine months of 2022 were $375.0 million compared to net sales of $284.2 million for the first nine months of 2021, an increase of 32.0% or $90.9 million. Domestic sales increased 39.4% or $77.1 million and international sales increased 15.6% or $13.8 million compared to the same period in 2021. Fill-Rite sales, which are primarily domestic, were $53.7 million from the acquisition date of May 31, 2022 to September 30, 2022.

Excluding Fill-Rite, sales in our water markets increased 13.4% or $27.1 million in the first nine months of 2022 compared to the first nine months of 2021. Sales increased $10.3 million in the fire market, $9.3 million in the municipal market, $4.7 million in the construction market, and $4.2 million in the repair markets. Partially offsetting these increases was a decrease of $1.4 million in the agriculture market.

Excluding Fill-Rite, sales in our non-water markets increased 12.4% or $10.1 million in the first nine months of 2022 compared to the first nine months of 2021. Sales increased $10.5 million in the industrial market and $2.3 million in the OEM market. Partially offsetting these increases was a decrease of $2.7 million in the petroleum market.

### Cost of Products Sold and Gross Profit

|  | Nine Months Ended September 30, 2022 | 2021 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Cost of products sold | $280,727 | $210,604 | $70,123 | 33.3% |
| % of Net sales | 74.9% | 74.1% |  |  |
| Gross Margin | 25.1% | 25.9% |  |  |

Gross profit was $94.3 million for the first nine months of 2022, resulting in gross margin of 25.1%, compared to gross profit of $73.5 million and gross margin of 25.9% for the same period in 2021. The 80 basis point decrease in gross margin was driven by a 280 basis point increase in cost of material, which included an unfavorable LIFO impact of 120 basis points, an unfavorable impact of 40 basis points related to Fill-Rite inventory recorded at fair value and recognized during the second quarter, and an unfavorable impact of 20 basis points related to the amortization of acquired Fill-Rite customer backlog. The full amount of the step-up to record Fill-Rite inventory at fair value was recognized during the second quarter and will not recur, while the Fill-Rite customer backlog will be amortized within the next three quarters. The decrease in gross margin was partially offset by a 200 basis point improvement from labor and overhead leverage due to increased sales volume.

### Selling, General and Administrative (SG&A) Expenses

|  | Nine Months Ended September 30, 2022 | 2021 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Selling, general and administrative expenses | $62,125 | $42,064 | $20,061 | 47.7% |
| % of Net sales | 16.6% | 14.8% |  |  |

Selling, general and administrative (“SG&A”) expenses were $62.1 million for the first nine months of 2022, which included $7.0 million of one-time acquisition costs. Excluding acquisition costs, SG&A expenses were $55.1 million and 14.7% of net sales for the first nine months of 2022 compared to $42.1 million and 14.8% of net sales for the same period in 2021. The decrease in SG&A expenses as a percentage of sales, excluding acquisition costs, is due to increased sales volume.

### Amortization expense

|  | Nine Months Ended September 30, 2022 | 2021 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Amortization expense | $4,498 | $356 | $4,142 | 1,163.5% |
| % of Net sales | 1.2% | 0.1% |  |  |

Amortization expense was $4.5 million for the first nine months of 2022 compared to $0.4 million for the same period in 2021. The increase in amortization expense was due to $4.0 million in amortization attributable to the Fill-Rite acquisition.

### Operating Income

|  | Nine Months Ended September 30, 2022 | 2021 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Operating income | $27,676 | $31,128 | $(3,452) | (11.1)% |
| % of Net sales | 7.4% | 11.0% |  |  |

Operating income was $27.7 million for the first nine months of 2022, which included $7.0 million in one-time acquisition costs, $1.4 million of inventory step up amortization, and $0.9 million of acquired customer backlog amortization. Excluding acquisition costs, inventory step-up and backlog amortization, operating income was $37.0 million for the first nine months of 2022, resulting in an operating margin of 9.9%, compared to operating income of $31.1 million and operating margin of 11.0% for the same period in 2021. The decrease of 110 basis points in operating margin was primarily the result of an unfavorable LIFO impact.

### Other Income (Expense), net

|  | Nine Months Ended September 30, 2022 | 2021 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Other income (expense), net | $(7,079) | $(1,846) | $(5,233) | (283.5)% |
| % of Net sales | 1.9% | 0.6% |  |  |

Other income (expense), net was $7.1 million of expense for the first nine months of 2022 compared to expense of $1.8 million for the same period in 2021. The increase in expense was due primarily to increased non-cash pension settlement charges of $6.4 million for the first nine months of 2022 compared to $2.1 million for the first nine months of 2021.

### Net Income

|  | Nine Months Ended September 30, 2022 | 2021 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Income before income taxes | $10,719 | $29,282 | $(18,563) | (63.4)% |
| % of Net sales | 2.9% | 10.3% |  |  |
| Income taxes | $1,951 | 5974 | $(4,023) | (67.3)% |
| Effective tax rate | 18.2% | 20.4% |  |  |
| Net income | $8,768 | $23,308 | $(14,540) | (62.4)% |
| % of Net sales | 2.3% | 8.2% |  |  |
| Earnings per share | $0.34 | $0.89 | $(0.55) | (61.8)% |

The Company’s effective tax rate was 18.2% for the first nine months of 2022 compared to 20.4% for the first nine months of 2021 with the decrease primarily related to the effect of permanent items on lower income before tax.

Net income was $8.8 million, or $0.34 per share, for the first nine months of 2022 compared to $23.3 million for the first nine months of 2021, or $0.89 per share. Adjusted earnings per share for the first nine months of 2022 were $0.81 per share compared to $0.95 per share for the first nine months of 2021. Adjusted earnings per share for the first nine months of 2022 included an unfavorable LIFO impact of $0.30 per share compared to an unfavorable LIFO impact of $0.12 per share for the first nine months of 2021. Adjusted earnings also included incremental non-cash amortization expense related to Fill-Rite of $0.12 per share.

### Liquidity and Capital Resources

Our primary sources of liquidity are cash generated from operations and borrowings under our Credit Facility. Cash and cash equivalents totaled $10.3 million at September 30, 2022. The Company had an additional $93.1million available under the revolving credit facility after deducting $5.0 million drawn and $1.9 million in outstanding letters of credit primarily related to customer orders. During the nine months ended September 30, 2022, our debt obligations increased by $440.6 million as a result of the Senior Term Loan Facility, revolving Credit Facility and Subordinated Credit Facility entered into in connection with the Fill-Rite acquisition. See Note 10 “Financing Arrangements” in the Notes to our Consolidated Financial Statements.

Free cash flow, a non-GAAP measure for reporting cash flow, is defined by the Company as adjusted earnings before interest, income taxes and depreciation and amortization, less capital expenditures and dividends. The Company believes free cash flow provides investors with an important perspective on cash available for investments, acquisitions and working capital requirements.

The following table reconciles adjusted earnings before interest, income taxes and depreciation and amortization as reconciled above to free cash flow:

|  | Nine Months Ended September 30, 2022 | 2021 |
| --- | ---: | ---: |
| Non-GAAP adjusted earnings before interest, taxes, depreciation and amortization | $50,435 | $40,306 |
| Less capital expenditures | (11,268) | (5,617) |
| Less cash dividends | (13,306) | (12,145) |
| Non-GAAP free cash flow | $25,861 | $22,544 |

20

### Financial Cash Flow

|  | Nine Months Ended September 30, 2022 | 2021 |
| --- | ---: | ---: |
| Beginning of period cash and cash equivalents | $125,194 | $108,203 |
| Net cash provided by operating activities | 12,508 | 41,535 |
| Net cash used for investing activities | (537,242) | (5,045) |
| Net cash provided by financing activities | 411,087 | (13,065) |
| Effect of exchange rate changes on cash | (1,259) | (508) |
| Net increase (decrease) in cash and cash equivalents | (114,906) | 22,917 |
| End of period cash and cash equivalents | $10,288 | $131,120 |

The decrease in cash provided by operating activities in the first nine months of 2022 compared to the same period last year was primarily due to interest expense of $9.9 million and acquisition costs of $7.0 million, as well as increases for the nine month period in accounts receivable and inventory as the result of increased sales and backlog. In addition, deferred revenue and customer deposits have decreased in the first nine months of the current year compared to an increase in the same period of the prior year.

During the first nine months of 2022, investing activities of $537.2 million consisted of $526.3 million for the acquisition of Fill-Rite and $11.3 million for capital expenditures primarily for machinery and equipment. During the first nine months of 2021, investing activities consisted of capital expenditures primarily for machinery and equipment of $5.6 million.

Net cash received from financing activities for the first nine months of 2022 of $415.5 million consisted of proceeds from the new Senior Secured loan of $350.0 million, $90.0 million in unsecured subordinated debt, and $5.0 million from the new revolving credit facility. Partially offsetting these proceeds were debt issuance fees paid of $15.2 million, dividend payments of $13.3 million, payments on bank borrowing of $4.4 million and share repurchases of $0.9 million during the first nine months of 2022. Net cash used from financing activities in 2021 primarily consisted of dividend payments of $12.1 million. There were no share repurchases for the first nine months of 2021.

Maturities of long-term debt in the next five fiscal years, and the remaining years thereafter, are as follows:

| 2022 (three months) | 2023 | 2024 | 2025 | 2026 | 2027 | Total |
| ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| $4,375 | $17,500 | $21,875 | $30,625 | $35,000 | $331,250 | $440,625 |

The Company was in compliance with its debt covenants, including limits on additional borrowings and maintenance of certain operating and financial ratios, at September 30, 2022 and December 31, 2021. We believe we have adequate liquidity from funds on hand and borrowing capacity to execute our financial and operating strategy, as well as comply with debt obligations and financial covenants for the next 12 months.

The Company currently expects to continue its exceptional history of paying regular quarterly dividends and increased annual dividends. However, any future dividends will be reviewed individually and declared by our Board of Directors at its discretion, dependent on our assessment of the Company’s financial condition and business outlook at the applicable time.

The Board of Directors has authorized a share repurchase program of up to $50.0 million of the Company’s common shares. The actual number of shares repurchased will depend on prevailing market conditions, alternative uses of capital and other factors, and will be determined at management’s discretion. The Company is not obligated to make any purchases under the program, and the program may be suspended or discontinued at any time. As of September 30, 2022, the Company had $48.1 million available for repurchase under the share repurchase program.

### Critical Accounting Policies

Our critical accounting policies are described in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and in the notes to our Consolidated Financial Statements for the year ended December 31, 2021 contained in our Annual Report on Form 10-K for the year ended December 31, 2021. Any new accounting policies or updates to existing accounting policies as a result of new accounting pronouncements have been discussed in the notes to our Consolidated Financial Statements in this Quarterly Report on Form 10-Q. The application of our critical accounting policies may require management to make judgments and estimates about the amounts reflected in the Consolidated Financial Statements. Management uses historical experience and all available information to make these estimates and judgments, and different amounts could be reported using different assumptions and estimates.

### Cautionary Note Regarding Forward-Looking Statements

In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, The Gorman-Rupp Company provides the following cautionary statement: This Form 10-Q contains various forward-looking statements based on assumptions concerning The Gorman-Rupp Company’s operations, future results and prospects. These forward-looking statements are based on current expectations about important economic, political, and technological factors, among others, and are subject to risks and uncertainties, which could cause the actual results or events to differ materially from those set forth in or implied by the forward-looking statements and related assumptions.

Such uncertainties include, but are not limited to, our estimates of future earnings and cash flows, general economic conditions and supply chain conditions and any related impact on costs and availability of materials, integration of the Fill-Rite business in a timely and cost effective manner, retention of supplier and customer relationships and key employees, the ability to achieve synergies and cost savings in the amounts and within the time frames currently anticipated and the ability to service and repay indebtedness incurred in connection with the transaction. Other factors include, but are not limited to: company specific risk factors including (1) loss of key personnel; (2) intellectual property security; (3) acquisition performance and integration; (4) impairment in the value of intangible assets, including goodwill; (5) defined benefit pension plan settlement expense; and (6) family ownership of common equity; and general risk factors including (7) continuation of the current and projected future business environment, including the impact of inflation and other cost pressures, the duration and scope of the COVID-19 pandemic, the impact of the pandemic and actions taken in response to the pandemic; (8) highly competitive markets; (9) availability and costs of raw materials and labor; (10) cyber security threats; (11) compliance with, and costs related to, a variety of import and export laws and regulations; (12) environmental compliance costs and liabilities; (13) exposure to fluctuations in foreign currency exchange rates; (14) conditions in foreign countries in which The Gorman-Rupp Company conducts business; (15) changes in our tax rates and exposure to additional income tax liabilities; and (16) risks described from time to time in our reports filed with the Securities and Exchange Commission. Except to the extent required by law, we do not undertake and specifically decline any obligation to review or update any forward-looking statements or to publicly announce the results of any revisions to any of such statements to reflect future events or developments or otherwise.

## Market risk

As filed, 3,017 characters.

We are exposed to various market risks, including changes in foreign currency exchange rates and interest rates. Exposure to foreign exchange rate risk is due to certain costs and revenue being denominated in currencies other than one of the Company’s subsidiaries functional currency. The Company is also exposed to market risk as the result of changes in interest rates which may affect the cost of financing. We continually monitor these risks and regularly develop appropriate strategies to manage them. Accordingly, from time to time, we may enter into certain derivative or other financial instruments. These financial instruments are used to mitigate market exposure and are not used for trading or speculative purposes.

### Interest Rate Risk

The results of operations are exposed to changes in interest rates primarily with respect to borrowings under the Company’s Senior Term Loan Facility, Credit Facility, and Subordinated Credit Facility. Borrowings under the Senior Term Loan Facility and Credit Facility may be made either at (i) a base rate plus the applicable margin, which ranges from 0.75% to 1.75%, or at (ii) an Adjusted Term SOFR Rate, plus the applicable margin, which ranges from 1.75% to 2.75%. Borrowings under the Subordinated Credit Facility bear interest at (i) either a base rate plus 8.0%, or at (ii) an Adjusted Term SOFR Rate plus 9.1%. At September 30, 2022, the Company had $345.6 million in borrowings under the Senior Term Loan Facility, $5.0 million in borrowing under the Credit Facility, and $90.0 million in borrowings under the Subordinated Credit Facility.

To reduce the exposure to changes in the market rate of interest, effective October 31, 2022, the Company entered into interest rate swap agreements for a portion of the Senior term loan facility. Terms of the interest rate swap agreements require the Company to receive a fixed interest rate and pay a variable interest rate. The interest rate swap agreements are expected to be designated as a cash flow hedge, and as a result, the mark-to-market gains or losses will be deferred and included as a component of accumulated other comprehensive income (loss) and reclassified to interest expense in the period during which the hedged transactions affect earnings.

The Company estimates that a hypothetical increase of 100 basis points in interest rates would increase interest expense by approximately $2.7 million on an annual basis.

### Foreign Currency Risk

The Company’s foreign currency exchange rate risk is limited primarily to the Euro, Canadian Dollar, South African Rand and British Pound. The Company manages its foreign exchange risk principally through invoicing customers in the same currency as is used in the market of the source of products. The foreign currency transaction gains (losses) for the nine month periods ending September 30, 2022 and 2021 were ($0.2) million and $0.1 million, respectively, and are reported within Other (expense) income, net on the Consolidated Statements of Income.

## Controls and procedures

As filed, 2,086 characters.

### Evaluation of Disclosure Controls and Procedures

The Company maintains a set of disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. The Company’s disclosure controls and procedures are also designed to ensure that information required to be disclosed in Company reports filed under the Securities Exchange Act of 1934 is accumulated and communicated to the Company’s management, including the principal executive officer and the principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

An evaluation was carried out under the supervision and with the participation of the Company’s management, including the principal executive officer and the principal financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this report on Form 10-Q. Based on that evaluation, the principal executive officer and the principal financial officer have concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2022.

### Changes in Internal Control Over Financial Reporting

As of September 30, 2022, we are in the process of integrating the internal controls of the acquired Fill-Rite business into Gorman-Rupp’s existing operations as part of planned integration activities. In addition, we have implemented new processes and internal controls to assist us in the preparation and disclosure of financial information. There were no other changes in Gorman-Rupp’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, Gorman-Rupp’s internal control over financial reporting during the quarter ended September 30, 2022.

## Risk factors

As filed, 3,862 characters.

In addition to the information set forth in this report, you should carefully consider the risk factors disclosed in Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021. There have been no material changes from the risk factors disclosed in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, except for the following which supplements the Company’s previously disclosed risk factors:

***The Company incurred substantial indebtedness, which may impact the Company’s financial condition and the way it operates its business.***

In connection with the Company’s acquisition of the assets of Fill-Rite, the Company incurred substantial indebtedness. Such indebtedness includes senior secured first lien credit facilities comprised of a $350 million term loan facility and a $100 million revolving credit facility, and an unsecured senior subordinated term loan facility in an aggregate principal amount of $90 million. The indebtedness could have important negative consequences, including:

- higher borrowing costs resulting from fluctuations in our variable benchmark borrowing rates that could adversely affect our interest rates;
- reduced availability of cash for the Company’s operations and other business activities after satisfying interest payments and other requirements under the terms of its debt instruments;
- less flexibility to plan for or react to competitive challenges, and a competitive disadvantage relative to competitors that do not have as much indebtedness;
- difficulty in obtaining additional financing in the future;
- inability to comply with covenants in, and potential for default under, the Company’s debt instruments;
- inability to operate our business or to take advantage of business opportunities due to restrictions created from the debt covenants; and
- challenges to repaying or refinancing any of the Company’s debt.

The Company’s ability to satisfy its debt and other obligations will depend principally upon its future operating performance. As a result, prevailing economic conditions and financial, business, legal and regulatory and other factors, many of which are beyond the Company’s control, may affect its ability to make payments on its debt and other obligations.

***The Company’s operations are subject to the general risks associated with acquisitions.***

The Company has historically made strategic acquisitions of businesses, such as Fill-Rite, and may do so in the future in support of its strategy. The success of past and future acquisitions is dependent on the Company’s ability to successfully integrate acquired and existing operations. If the Company is unable to integrate acquisitions successfully, its financial results could suffer. Additional potential risks associated with acquisitions are the diversion of management’s attention from other business concerns, additional debt leverage, the loss of key employees and customers of the acquired business, the assumption of unknown liabilities, disputes with sellers, and the inherent risk associated with the Company entering new lines of business.

### The anticipated benefits from the Fill-Rite acquisition may not be realized.

The Company may not realize the full benefits of the increased sales volume and other benefits that are currently expected to result from the Fill-Rite acquisition, or realize these benefits within the time frame that is currently expected. In addition, the benefits of the Fill-Rite acquisition may be offset by operating losses relating to changes in material or energy prices, inflationary economic conditions, increased competition, or by other risks and uncertainties. If the Company fails to realize the benefits it anticipates from the Fill-Rite acquisition, the Company’s results of operations may be adversely affected.

Filed Oct 31, 2022.
Source: SEC EDGAR, the filing index for accession 0001437749-22-025154. Last ingested by Listed: Oct 30, 2026, 07:59 ET. No prices; not investment advice.