10-K 1 grc20231231_10k.htm FORM 10-K grc20231231_10k.htm
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2023

OR 

TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to __________

Commission file number 1-6747 

THE GORMAN-RUPP COMPANY

(Exact name of Registrant as specified in its charter)

 

Ohio

 

34-0253990

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

   

600 South Airport Road, Mansfield, Ohio

 

44903

(Address of principal executive offices)

 

(Zip Code)

Registrant’s telephone number, including area code: (419) 755-1011

Securities registered pursuant to Section 12(b) of the Act:  

Title of each class

 

Trading Symbol

 

Name of each exchange on which registered

Common Shares, without par value

 

GRC

 

New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ☐    No  ☒

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ☐    No  ☒

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.  

Large accelerated filer ☐

Accelerated filer

Non-accelerated filer ☐

Smaller reporting company

Emerging growth company

     

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐   

Indicate by check mark whether the Registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.      

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements.

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  ☒

The aggregate market value of the common shares, without par value, of The Gorman-Rupp Company held by non-affiliates based on the closing sales price as of June 30, 2023 was approximately $581,450,000.

On February 26, 2024, there were 26,218,334 common shares, without par value, of The Gorman-Rupp Company outstanding.

 

 

 

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of The Gorman-Rupp Company’s definitive Notice of 2024 Annual Meeting of Shareholders and related Proxy Statement (to be filed with the Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Form 10-K) are incorporated by reference into Part III (Items 10-14).

 

2

 

 

 

The Gorman-Rupp Company and Subsidiaries

 
Annual Report on Form 10-K
For the Year Ended December 31, 2023

 

 

PART I

Page

ITEM 1.

Business

4

ITEM 1A.

Risk Factors

7

ITEM 1B.

Unresolved Staff Comments

12

ITEM 1C.

Cybersecurity

12

ITEM 2.

Properties

13

ITEM 3.

Legal Proceedings

14

ITEM 4.

Mine Safety Disclosures

15

*

Information about our Executive Officers

 
 

PART II

 

ITEM 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

16

ITEM 6.

[Reserved]

17

ITEM 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

18

ITEM 7A.

Quantitative and Qualitative Disclosures about Market Risk

27

ITEM 8.

Financial Statements and Supplementary Data

28

ITEM 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

58

ITEM 9A.

Controls and Procedures

58

ITEM 9B.

Other Information

60

ITEM 9C.

Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

60
 

PART III

 

ITEM 10.

Directors, Executive Officers and Corporate Governance

60

ITEM 11.

Executive Compensation

61

ITEM 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

61

ITEM 13.

Certain Relationships and Related Transactions, and Director Independence

61

ITEM 14.

Principal Accounting Fees and Services

62
 

PART IV

 

ITEM 15.

Exhibits and Financial Statement Schedules

62
 

Exhibit Index

63

ITEM 16.

Form 10-K Summary

63
 

Signatures

64
     

*

Included pursuant to the instructions to Item 401 of Regulation S-K.

 

 

3

 

 

PART I

 

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 Annual Report on Form 10-K 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) the Company’s indebtedness and how it may impact the Company’s financial condition and the way it operates its business; (5) general risks associated with acquisitions; (6) the anticipated benefits from the Fill-Rite transaction may not be realized; (7) impairment in the value of intangible assets, including goodwill; (8) defined benefit pension plan settlement expense; (9) LIFO inventory method, and (10) family ownership of common equity; and general risk factors including (11) continuation of the current and projected future business environment; (12) highly competitive markets; (13) availability and costs of raw materials and labor; (14) cybersecurity threats; (15) compliance with, and costs related to, a variety of import and export laws and regulations; (16) environmental compliance costs and liabilities; (17) exposure to fluctuations in foreign currency exchange rates; (18) conditions in foreign countries in which The Gorman-Rupp Company conducts business; (19) changes in our tax rates and exposure to additional income tax liabilities; and (20) 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.

 

ITEM 1.

BUSINESS

 

The Gorman-Rupp Company (“Registrant”, “Gorman-Rupp”, the “Company”, “we” or “our”) was incorporated in Ohio in 1934. The Company designs, manufactures and globally sells pumps and pump systems for use in water, wastewater, construction, dewatering, industrial, petroleum, original equipment, agriculture, fire suppression, heating, ventilating and air conditioning (“HVAC”), military and other liquid-handling applications.

 

On May 31, 2022, the Company acquired the assets of Fill-Rite and Sotera (“Fill-Rite”), a division of Tuthill Corporation, for $528.0 million. The Company funded the transaction with cash on-hand and new debt. The results of operations for Fill-Rite from the acquisition date are included in the Company’s Consolidated Statements of Income.

 

PRODUCTS

 

The Company operates in one business segment, the manufacture and sale of pumps and pump systems. The following table sets forth, for the years 2021 through 2023, the total net sales, income before income taxes and year-end total assets of the Company.

 

   

(Dollars in thousands)

 
   

2023

   

2022

   

2021

 

Net sales

  $ 659,511     $ 521,027     $ 378,316  

Income before taxes

    43,961       13,872       37,248  

Total assets

    890,358       872,830       420,754  

 

4

 

The Company’s product line consists of pump models ranging in size from 1/4” to nearly 15 feet and ranging in rated capacity from less than one gallon per minute to nearly one million gallons per minute. The types of pumps which the Company produces include self-priming centrifugal, standard centrifugal, magnetic drive centrifugal, axial and mixed-flow, vertical turbine line shaft, submersible, high-pressure booster, rotary gear, rotary vein, diaphragm, bellows and oscillating.

 

The pumps have drives that range from 1/35 horsepower electric motors up to much larger electric motors or internal combustion engines capable of producing several thousand horsepower. Many of the larger units comprise encased, fully-integrated water and wastewater pumping stations. In certain cases, units are designed for the inclusion of customer-supplied drives.

 

The Company’s larger pumps are sold principally for use in the construction, industrial, water and wastewater handling fields; for flood control; for boosting low residential water pressure; for pumping refined petroleum products, including the ground refueling of aircraft; for fluid control in HVAC applications; and for various agricultural purposes.

 

The Company’s pumps are also utilized for dewatering purposes. Additionally, pumps manufactured for fire suppression are used for sprinkler back-up systems, fire hydrants, stand pipes, fog systems and deluge systems at hotels, banks, factories, airports, schools, public buildings and hundreds of other types of facilities throughout the world.

 

Many of the Company’s smallest pumps are sold to customers for incorporation into such products as food processing, chemical processing, medical applications, computer cooling, waste treatment, HVAC equipment, appliances and solar heating.

 

MARKETING

 

The Company’s pumps are marketed in the United States and worldwide through a broad network of distributors, through manufacturers’ representatives (for sales to many original equipment manufacturers), through third-party distributor catalogs, direct sales, and e-commerce. The Company regularly seeks alliances with distributors and other partners to further enhance marketing opportunities. Export sales are made primarily through foreign distributors and representatives. The Company has long-standing relationships with many of the leading independent distributors in the markets it serves and provides specialized training programs to distributors on a regular basis with a focus on meeting the world’s water and wastewater pumping needs.

 

During 2023, 2022 and 2021, there were no shipments to any single customer that exceeded 10% of total net sales. Gorman-Rupp continued to actively pursue international business opportunities and, in 2023, shipped its pumps to approximately 140 countries around the world. No sales made to customers in any one foreign country amounted to more than 10% of total net sales for 2023, 2022 or 2021.

 

COMPETITION

 

The pump industry is highly fragmented and therefore Gorman-Rupp competes with a large number of businesses. Numerous pump competitors exist as subsidiaries, divisions or departments within significantly larger corporations. The Company also faces increased competition from foreign-sourced pumps in most of the Company’s domestic markets.

 

Most commercial and industrial pumps are specifically designed and engineered for a particular customer’s application. The Company believes that proper application, product performance, and quality of delivery and service are its principal methods of competition, and attributes its success to its continued emphasis in these areas. In the sale of products and services, the Company benefits from its large base of previously installed products, which periodically require replacement parts due to the critical application and nature of the products and the conditions under which they operate.

 

5

 

PURCHASING AND PRODUCTION

 

Substantially all of the materials, supplies, components and accessories used by the Company in the fabrication of its products, including all castings (for which most patterns are made and owned by the Company), structural steel, bar stock, motors, solenoids, engines, seals, and plastic and elastomeric components are purchased by the Company from other suppliers and manufacturers. The Company does not purchase materials under long-term contracts and is not dependent upon a single source for any materials, supplies, components or accessories which are of material importance to its business.

 

The Company purchases motor components for its large submersible pumps, and motors and engines for its pump systems, from a limited number of suppliers, while motors for its polypropylene bellows pumps and magnetic drive pumps are purchased from several alternative vendors. Products requiring small motors are also sourced from alternative suppliers.

 

The other production operations of the Company consist of the machining of castings, the cutting, shaping and welding of bar stock and structural members, the design and assembly of electrical control panels, the manufacture of some small motors and a few minor components, and the assembling, painting and testing of its products. The majority of the Company’s products are tested prior to shipment.

 

HUMAN CAPITAL

 

As of December 31, 2023, the Company employed approximately 1,450 persons, of whom approximately 780 were hourly employees. The majority of the Company’s manufacturing operations take place in the United States, as evidenced by 88% of its employees being in the Company’s U.S. locations and 12% of its employees being in its international locations.

 

Our approach is to develop talent from within and supplement with external hires. We invest resources to develop the talent needed to remain a leading designer and manufacturer of pumps and pump systems. We provide our employees with training opportunities and educational benefits to assist in the expansion of their careers and skills. This approach has resulted in a deep understanding among our employee base of our business, products, and customers.  We believe that our average tenure of 12 years, as of the end of 2023, reflects both the strong engagement of our employees and our positive workplace culture.  Approximately 7% of our employees operate under a collective bargaining agreement. The Company has never experienced a work stoppage.

 

We provide competitive compensation and benefits programs to help meet the needs of our employees.  In addition to salaries, these programs (which vary by country and region) include profit sharing, a 401(k) plan, medical insurance and benefits, health savings accounts, paid time off, and tuition assistance, among others.  Certain domestic employees hired prior to January 1, 2008, and certain union employees, participate in defined benefit plans.  Non-union employees hired after this date, in eligible locations, participate in an enhanced 401(k) plan instead of the defined benefit plan.  To create performance incentives and to encourage share ownership by our employees, we have implemented an employee stock purchase plan, which enables eligible employees worldwide to purchase the Company’s common shares at a discount through payroll contributions. Because our business involves the manufacturing of products, many of our employees are unable to work from home. For certain positions, we do provide hybrid work from home options.

 

The health and safety of our workforce is fundamental to the success of our business.  We provide our employees upfront and ongoing safety training to ensure that safety policies and procedures are effectively communicated and implemented. We also provide personal protective equipment to those employees who need it to perform their job functions safely.  We have experienced personnel on-site at each of our manufacturing locations who are tasked with environmental, health and personal safety education and compliance.

 

6

 

We are committed to upholding fundamental human rights and believe that all human beings should be treated with dignity, fairness and respect.  This commitment is outlined in our Human Rights Policy which applies to all employees worldwide including part time and temporary workers. We communicate our expectation that suppliers also adhere to our Human Rights Policy through our Supplier Code of Conduct. We strive to promote inclusion and diversity in the workplace, engage with our communities, and encourage our suppliers to treat their employees in a manner that respects human rights.  We utilize an on-line platform to provide training to all employees worldwide in key areas such as harassment and discrimination prevention, human rights, and our code of conduct.  We also internally publicize the availability of an anonymous ethics hotline through which any employee may report any ethics, safety or other employment concerns.

 

OTHER ASPECTS

 

Although the Company owns a number of patents, several of which are important to its business, the Company does not consider its business to be materially dependent upon any one or more patents. The Company’s patents, trademarks and other intellectual property are adequate for its business purposes.

 

AVAILABLE INFORMATION

 

The Company maintains a website accessible through its internet address of www.gormanrupp.com. Gorman-Rupp makes available free of charge on or through www.gormanrupp.com its Annual Report to Shareholders, its annual Proxy Statement, its annual report on Form 10-K, its quarterly reports on Form 10-Q, and its current reports on Form 8-K, and any amendments to those reports, as soon as reasonably practicable after those reports (and any amendments) are electronically filed with or furnished to the Securities and Exchange Commission (“Commission”). However, the information contained on the Company’s website is not a part of this Form 10-K or any other report filed with or furnished to the Commission.

 

A paper copy of the Company’s Form 10-K is also available free of charge upon written request to the Company’s Corporate Secretary.

 

ITEM 1A. RISK FACTORS

 

Gorman-Rupp’s business and financial performance are subject to various risks and uncertainties, some of which are beyond its control. In addition to the risks discussed elsewhere in this Form 10-K, the following risks and uncertainties could materially adversely affect the Company’s business, prospects, financial condition, results of operations, liquidity and access to capital markets. These risks could cause the Company’s actual results to differ materially from its historical experience and from expected results discussed in forward-looking statements made by the Company related to conditions or events that it anticipates may occur in the future.

 

COMPANY SPECIFIC RISK FACTORS

 

Loss of key personnel

 

The Company’s success depends to a significant extent on the continued service of its executive management team and the ability to recruit, hire and retain other key management personnel to support the Company’s growth and operational initiatives and replace executives who retire or resign. Failure to retain key management personnel and attract and retain other highly-skilled personnel could limit the Company’s global growth and ability to execute operational initiatives, or may result in inefficient and ineffective management and operations, which could harm the Company’s revenues, operations and product development efforts and could eventually result in a decrease in profitability.

 

7

 

Intellectual property security

 

The Company possesses a wide array of intellectual property rights, including patents, trademarks, copyrights, and applications for the above, as well as other proprietary information. There is a risk that third parties would attempt to copy, in full or in part, the Company’s products, technologies or industrial designs, or to obtain unauthorized access and use of Company technological know-how or other protected intellectual property rights. Also, other companies could successfully develop technologies, products or industrial designs similar to the Company’s, and thus potentially compete with the Company. From time to time, the Company has been faced with instances where competitors have infringed or unfairly used its intellectual property or taken advantage of its design and development efforts. The ability to protect and enforce intellectual property rights varies across jurisdictions. Competitors who attempt to copy the Company’s products, technologies or industrial designs are becoming more prevalent, particularly in Asia. If the Company is unable to adequately enforce and protect its intellectual property rights, it could adversely affect its revenues and profits and hamper its ability to grow.

 

Competitors and others may also challenge the validity of the Company’s intellectual property or allege that it has infringed their intellectual property, including through litigation. The Company may be required to pay substantial damages if it is determined its products infringe the intellectual property of others. The Company may also be required to develop an alternative, non-infringing product that could be costly and time-consuming, or acquire a license (if available) on terms that are not favorable to it. Regardless of whether infringement claims against the Company are successful, defending against such claims could significantly increase the Company’s costs, divert management’s time and attention away from other business matters, and otherwise adversely affect the Company’s results of operations and financial condition.

 

Growth through Acquisitions

 

The Company’s historical growth has depended, and its future growth is likely to continue to depend, in part on its acquisition strategy and the successful integration of acquired businesses into existing operations. The Company intends to continue to seek additional domestic and international acquisition opportunities that have the potential to support and strengthen its operations. The Company cannot assure it will be able to successfully identify suitable acquisition opportunities, prevail against competing potential acquirers, negotiate appropriate acquisition terms, obtain financing that may be needed to consummate such acquisitions, complete proposed acquisitions, successfully integrate acquired businesses into existing operations or expand into new markets. In addition, the Company cannot assure that any acquisition, even if successfully integrated, will perform as planned, be accretive to earnings, or prove to be beneficial to the Company’s operations and cash flows.

 

The Company has substantial indebtedness, which may impact the Companys financial condition and the way it operates its business

 

The Company has 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 have adversely affected, and could in the future 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.

 

8

 

Acquisition performance and integration

 

The Company has historically made strategic acquisitions of businesses 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 transaction 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 transaction, or realize these benefits within the time frame that is currently expected. In addition, the benefits of the Fill-Rite transaction 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 transaction, the Company’s results of operations may be adversely affected.

 

Impairment in the value of intangible assets, including goodwill

 

The Company’s total assets reflect goodwill from acquisitions, representing the excess cost over the fair value of the identifiable net assets acquired, including other indefinite-lived and finite-lived intangible assets. Goodwill and other indefinite-lived intangible assets are not amortized but are reviewed annually for impairment as of October 1 or whenever events or changes in circumstances indicate there may be a possible permanent loss of value using either a quantitative or qualitative analysis. Finite-lived assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount may not be recovered through future net cash flows generated by the assets. If future operating performance at one or more of the Company’s reporting units were to fall significantly below forecast levels or if market conditions for one or more of its acquired businesses were to decline, the Company could be required to incur a non-cash charge to operating income for impairment. Any impairment in the value of these assets could have an adverse non-cash impact on the Company’s reported results of operations.

 

Defined benefit pension plan settlement expense

 

The Company sponsors a defined benefit pension plan (“GR Plan”) covering certain domestic employees and accrues amounts for funding of its obligations under the plan. The GR Plan allows eligible retiring employees to receive a lump-sum distribution for benefits earned in lieu of annual payments and most of the Company’s retirees historically have elected this option. Under applicable accounting rules, if the lump-sum distributions made for a plan year exceed an actuarially-determined threshold of the total of the service cost and interest cost for the plan year, the Company at such point would be required to recognize for that year’s results of operations settlement expense for the resulting unrecognized actuarial loss. The Company has been required to make such adjustments in prior periods, and, if such non-cash adjustments are necessary in future periods, they may negatively impact the Company’s operating results.

 

There was no pension settlement charge recorded in 2023. In 2022 and 2021, the Company recorded pre-tax non-cash pension settlement charges of $6.4 million and $2.3 million, respectively, driven by lump-sum distributions discussed above. See Note 9 to the Consolidated Financial Statements, Pensions and Other Postretirement Benefits.

 

LIFO inventory method

 

The majority of the Company’s inventories are valued on the last-in, first-out (LIFO) method and stated at the lower of cost or market. Current cost approximates replacement cost, or market, and LIFO cost is determined at the end of each fiscal year based on inventory levels on-hand at current replacement cost and a LIFO reserve. The Company uses the simplified LIFO method, under which the LIFO reserve is determined utilizing the inflation factor specified in the Producer Price Index for Machinery and Equipment – Pumps, Compressors and Equipment, as published by the U.S. Bureau of Labor Statistics. Interim LIFO calculations are based on management’s estimate of the expected year-end inflation index and, as such, are subject to adjustment each quarter including the fourth quarter when the inflation index for the year is finalized. If inflation causes the Producer Price Index for Machinery and Equipment – Pumps, Compressors and Equipment to increase in future periods, the LIFO reserve will increase with a corresponding increase to non-cash LIFO expense which may negatively impact the Company’s operating results.

 

9

 

In 2023, 2022, and 2021, the Company recorded pre-tax non-cash LIFO expense of $6.9 million, $18.0 million, and $6.7 million, respectively. See Note 4 to the Consolidated Financial Statements, Inventories.

 

As of December 31, 2023 we had a LIFO reserve of $95.1 million, which at the current U.S. Corporate tax rate, represents approximately $20.0 million of income taxes, payment of which is delayed to future dates based upon changes in inventory costs. From time-to-time, discussions regarding changes in U.S. tax laws have included the potential of LIFO being repealed. Should LIFO be repealed, the $20.0 million of postponed taxes, plus any future benefit realized prior to the date of repeal, would likely have to be repaid over some period of time. Repayment of these postponed taxes will reduce the amount of cash that we would have available to fund our operations, working capital, capital expenditures, acquisitions, or general corporate or other business activities. This could materially and adversely affect our business, financial condition and results of operations,

 

Family ownership of common equity

 

A substantial percentage of the Company’s common shares is held by various members of the Gorman family and their respective affiliates. Because of this concentrated ownership relative to many other publicly-traded companies, the market price of the Company’s common shares may be influenced by lower trading volume and therefore more susceptible to price fluctuations than many other companies’ shares. If any one or more of the Company’s significant shareholders were to sell all or a portion of their holdings of Company common shares at once or within short periods of time, or there was an expectation that such a sale was imminent, then the market price of the Company’s common shares could be negatively affected.

 

GENERAL RISK FACTORS

 

Continuation of current and projected future business environment

 

The overall pump industry is cyclical in nature, and some of its business activity is related to general business conditions in the durable goods and capital equipment markets. Demand for most of the Company’s products and services is affected by the level of new capital investment and planned maintenance expenditures by its customers. The level of such investment and expenditures by our customers depends, in turn, on factors such as general economic conditions, availability of credit, economic conditions within their respective industries and expectations of future market behavior. Volatility or sustained increases in prices of commodities such as oil and agricultural products can negatively affect the levels of investment and expenditures of certain customers and result in postponement of capital investment decisions or the delay or cancellation of existing orders. Inflationary economic conditions may further increase prices and exacerbate these risks. Any of these developments may negatively impact the Company’s sales.

 

Highly competitive markets

 

Gorman-Rupp sells its products in highly competitive markets. Maintaining and improving the Company’s competitive position requires periodic investment in manufacturing, engineering, quality standards, marketing, customer service and support, and distribution networks. Even with such investment, the Company may not be successful in maintaining its competitive position. The Company’s competitors may develop products that are superior to its products, or may develop methods of more efficiently and effectively providing products and services, or may adapt more quickly to new technologies or evolving customer requirements. Pricing pressures may require the Company to adjust the prices of its products downward to stay competitive. The Company may not be able to compete successfully with its existing competitors or with new competitors. Failure to compete successfully could negatively impact the Company’s sales, operating margins and overall financial performance.

 

10

 

Availability and costs of raw materials and labor

 

The Company could be adversely affected by raw material price volatility or an inability of its suppliers to meet quality and delivery requirements. We are required to maintain sufficient inventories to accommodate the needs of our customers, often with short lead times. Our business could be adversely affected if we fail to source and maintain adequate inventory levels. Raw material and energy expenses are substantial drivers of costs in the manufacture of pumps and changes in these costs are often unpredictable. While the Company manufactures certain parts and components used in its products, the Company’s business requires substantial amounts of raw materials, parts and components to be purchased from suppliers. The availability and prices of raw materials, parts and components purchased from the Company’s suppliers may be subject to curtailment or change due to, among other things, suppliers’ allocations to other purchasers, interruptions or delays in production or deliveries by suppliers, changes in exchange rates, tariffs, changes in duty rates and changes in other trade barriers and import and export licensing requirements.

 

The Company's business depends, in part, upon the adequate recruitment and retention, and continued service of, key managerial, engineering, marketing, sales and technical and operational personnel. Economic conditions may cause an increasingly competitive labor market, which could lead to labor shortages or increased turnover rates within, or increased labor costs to maintain, the Company’s employee base.

 

These considerations may also impact the operations of the Company’s suppliers, who may seek to pass along any increased costs to the Company. Inflationary economic conditions may further increase these various costs. The Company may not be able to pass along any increased material or labor costs to customers for competitive or other reasons. A change in the availability of, or increases in the costs associated with raw materials, parts and components or labor and workforce could affect our ability to fulfill our customer backlog and materially affect our business, financial condition, results of operations or cash flows.

 

Cybersecurity threats

 

Increased global information technology security threats and more sophisticated and targeted computer crime pose a risk to the security of Gorman-Rupp’s systems and networks and to the confidentiality, availability, and integrity of its data. While the Company attempts to mitigate these risks by employing a number of measures, including employee training, comprehensive monitoring of its networks and systems, and the deployment of backup and protective systems, the Company’s systems, networks, proprietary information, products, solutions and services remain potentially vulnerable to advanced persistent threats. Depending on their nature and scope, such threats could potentially lead to liability for damages or the loss of confidential information including as a result of, but not limited to, the compromising of confidential information relating to customer, supplier, or employee data, improper use of the Company’s systems and networks, manipulation and destruction of data, defective products, production downtimes and operational disruptions which, in turn, could adversely affect Gorman-Rupp’s reputation, competitiveness and results of operations.

 

Compliance with, and costs related to, a variety of import and export laws and regulations

 

The Company is subject to a variety of laws and regulations regarding international operations, including regulations issued by the U.S. Department of Commerce Bureau of Industry and Security and various other domestic and foreign governmental agencies. Actual or alleged violations of import-export laws could result in enforcement actions and/or financial penalties. The Company cannot predict the nature, scope or effect of future regulatory requirements to which our international operations and trading practices might be subject or the manner in which existing laws or regulations might be administered or interpreted. Future legislation or regulations could limit the countries in which certain of our products may be manufactured or sold or could restrict our access to, and increase the cost of obtaining, products from foreign sources.

 

Environmental compliance costs and liabilities

 

The Company’s operations and properties are subject to numerous domestic and foreign environmental laws and regulations which can impose operating and/or financial sanctions for violations. Moreover, environmental and sustainability initiatives, practices, rules and regulations are under increasing scrutiny of both governmental and non-governmental bodies and may require changes to the Company’s operational practices, standards and expectations and, in turn, increase the Company’s compliance costs. Periodically, the Company has incurred, and it expects to continue to incur, operating and capital costs to comply with environmental requirements. The Company monitors its environmental responsibilities, together with trends in the related laws, and believes it is in substantial compliance with current regulations. If the Company is required to incur increased compliance costs or violates environmental laws or regulations, future environmental compliance expenditures or liabilities could have a material adverse effect on our financial condition, results of operations or cash flows.

 

11

 

Exposure to fluctuations in foreign currency exchange rates

 

The Company is exposed to fluctuations in foreign currency exchange rates, particularly with respect to the Euro, Canadian Dollar, South African Rand and British Pound. Any significant change in the value of these currencies could affect the Company’s ability to sell products competitively and control its cost structure, which could have a material effect on its financial condition, results of operations or cash flows.

 

Conditions in foreign countries in which the Company conducts business

 

In 2023, 25% of the Company’s net sales were to customers outside the United States. The Company expects its international and export sales to continue to be a significant portion of its revenue. The Company’s sales from international operations and export sales, and the availability and prices of certain raw materials, parts, and components, are subject, in varying degrees, to risks inherent to doing business outside the United States. These risks include, but are not limited to, the following, some of which are further addressed in our other Risk Factors:

 

 

Possibility of unfavorable circumstances arising from host country laws or regulations;

 

 

Currency exchange rate fluctuations and restrictions on currency repatriation;

 

 

Potential negative consequences from changes to taxation policies;

 

 

Disruption of operations from labor or political disturbances, or public health crises;

 

 

Changes in tariffs, duty rates, and other trade barriers and import and export licensing requirements;

 

 

Increased costs and risks of developing, staffing and simultaneously managing a number of global operations as a result of distance as well as language and cultural differences; and

 

 

Insurrections, armed conflicts, terrorism or war.

 

Any of these events could have an adverse impact on the Company’s business and operations.

 

Changes in our tax rates and exposure to additional income tax liabilities

 

Gorman-Rupp is subject to income and other taxes in the United States federal jurisdiction and various local, state and foreign jurisdictions. The Company’s future effective income tax rates could be unfavorably affected by various factors, including changes in the tax rates as well as rules and regulations in relevant jurisdictions. In addition, the amount of income taxes paid is subject to ongoing audits by U.S. federal, state and local tax authorities and by non-U.S. authorities.  If these audits result in assessments different from amounts recorded, the Company’s future financial results may include unfavorable adjustments.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 1C. CYBERSECURITY

 

The Company recognizes the importance of developing, implementing, and maintaining cybersecurity measures to ensure the security of our information systems and networks and the confidentiality, availability, and integrity of our data.

 

Risk management and strategy

 

The Company continues to build its culture of security and has integrated cybersecurity risk management into our broader enterprise risk management process. This integration ensures that cybersecurity considerations are an integral part of our decision-making processes and operational practices. Our information technology department works closely with our senior management team to continuously evaluate and address cybersecurity risks in alignment with our business objectives and operational needs.

 

12

 

The Company provides training to all employees that reinforces the Company’s information technology risk and security management policies, standards and practices, as well as the expectation that employees comply with these policies. The training assists employees with identifying potential cybersecurity risks and threats and how to protect the Company’s resources and information. This training is mandatory for all employees globally on a periodic basis, and it is supplemented by firmwide internal and external service providers testing initiatives, including frequent phishing tests.

 

In addition to the employee training program, the Company has created an information security incident response policy and team. The risks related to cybersecurity, including the effectiveness of our training programs, are monitored on an ongoing basis by our information technology department and external service providers. In addition, to assess the incident response policy, periodically the Company engages a third-party expert to oversee a cybersecurity incident response training exercise and to facilitate group discussions regarding the effectiveness of the Company’s cybersecurity incident response strategies and tactics.

 

Recognizing the complexity and evolving nature of cybersecurity threats, Gorman-Rupp engages with a range of external experts, including cybersecurity assessors, consultants, and auditors, in evaluating and testing our risk management systems. These external experts leverage their specialized knowledge and insights on cybersecurity to assess and enhance our internal policies and processes through regular audits, threat assessments, and consultation on security enhancements and strategies.

 

We have not encountered cybersecurity challenges that have materially impaired our operations or financial standing. See Item 1A. Risk Factors – General Risk Factors - Cybersecurity threats.

 

Governance

 

The Board of Directors believes that control and management of risk are primary responsibilities of senior management of the Company. As a general matter, the entire Board of Directors is responsible for oversight of this important senior management function. The Audit Committee is responsible to the Board for the organizational oversight of the Company’s comprehensive enterprise risk management plan, including cyber risks. The Audit Committee is composed of board members with diverse expertise, including risk management, technology, and finance, equipping them to oversee cybersecurity risks effectively.

 

Senior management plays a pivotal role in informing the Audit Committee on cybersecurity risks. The information technology department regularly informs the Chief Financial Officer (CFO) of all aspects related to cybersecurity risks and incidents. This ensures that senior management is kept abreast of the cybersecurity posture and potential risks. The senior management team presents updates to the Audit Committee quarterly and, as necessary, to the full Board. These regular reports include detailed updates on the Company’s performance preparing for, preventing, detecting, responding to and recovering from cyber incidents, if applicable.

 

ITEM 2. PROPERTIES

 

The Company conducts business at plants and offices that are owned or leased and located in the United States and other countries as described below. The following table sets forth the location, approximate size, principal use, markets served, ownership status and utilization of each of our material facilities. Our facilities have the capacity to work three full-time shifts up to seven days per week as well as automated machining running during unstaffed hours, which the Company defines as full utilization.  At partial utilization, our facilities are working one fully staffed shift five days per week, supplemented with partial second shifts and running certain automated machining operations during peak periods. We believe we make effective use of our productive capacities at our facilities. We consider our plants, machinery and equipment to be well maintained and in good operating condition. We believe the quality and production capacity of our facilities is sufficient to maintain our competitive position for the foreseeable future.

 

13

 

Properties

 

Approximate

Sq Footage

 

Principal Use

 

Markets Served

 

Owned/

Leased

 

Utilization

United States

                   

Bellville, OH

 

 98,000

 

Manufacturing, R&D

 

Industrial, OEM

 

Owned

 

Partial

Fort Wayne, IN

 

 125,000

 

Manufacturing, R&D

 

Industrial, agriculture, construction

 

Owned

 

Partial

Glendale, AZ

 

 32,000

 

Manufacturing, R&D

 

Industrial, agriculture, municipal, pretroleum, OEM

 

Owned

 

Partial

Lenexa, KS

 

 142,000

 

Manufacturing

 

Industrial, agriculture, construction

 

Leased

 

Partial

Lubbock, TX

 

 60,000

 

Manufacturing

 

Industrial, agriculture, municipal, pretroleum, OEM

 

Owned

 

Partial

Mansfield, OH (2 properties)

 

 970,000

 

Corporate HQ, Manufacturing, R&D

 

Industrial, construction, municipal, pretroleum, OEM

 

Owned

 

Partial

Olive Branch, MS

 

 62,000

 

Manufacturing

 

Industrial, agriculture, municipal, pretroleum, OEM

 

Owned

 

Partial

Royersford, PA (2 properties) 

 

 120,000

 

Manufacturing

 

Industrial, agriculture, construction, municipal, OEM

 

Owned

 

Partial

Toccoa, GA

 

 295,000

 

Manufacturing, R&D

 

Industrial, fire, municipal

 

Owned

 

Partial

                     

Other Countries

                   

County Westmeath, Ireland

 

 42,000

 

Manufacturing

 

Industrial, fire, municipal

 

Owned

 

Partial

Waardenburg, The Netherlands

 

 41,000

 

Manufacturing

 

Industrial, agriculture, construction, municipal, pretroleum, OEM

 

Owned

 

Partial

St. Thomas, Ontario, Canada

 

 63,000

 

Manufacturing

 

Industrial, agriculture, construction, municipal, pretroleum, OEM

 

Owned

 

Partial

Johannesburg, South Africa

 

 38,000

 

Manufacturing

 

Industrial, agriculture, construction, municipal, pretroleum, OEM

 

Owned

 

Partial

Namur, Belgium

 

 18,000

 

Manufacturing

 

Industrial, agriculture, construction, municipal, pretroleum, OEM

 

Owned

 

Partial

 

ITEM 3. LEGAL PROCEEDINGS

 

For over twenty years, numerous business entities in the pump and fluid-handling industries, as well as a multitude of companies in many other industries, have been targeted in a series of lawsuits in several jurisdictions by various individuals seeking redress to claimed injury as a result of the entities’ alleged use of asbestos in their products. Since 2001, the Company and some of its subsidiaries have been involved in this mass-scaled litigation, typically as one of many co-defendants in a particular proceeding. The allegations in the lawsuits involving the Company and/or its subsidiaries have been vague, general and speculative. Most of these lawsuits have been dismissed without advancing beyond the early stage of discovery, some as a result of nominal monetary settlements recommended for payment by the Company's insurers. The claims and related legal expenses generally have been covered by the Company's insurance, subject to applicable deductibles and limitations. Accordingly, this series of lawsuits has not, cumulatively or individually, had a material adverse impact on the Company's consolidated results of operations, liquidity or financial condition, nor is it expected to have any such impact in the future, based on the current knowledge of the Company.

 

14

 

In addition, the Company and/or its subsidiaries are parties in a small number of legal proceedings arising in the ordinary course of business. Management does not currently believe that these proceedings will materially impact the Company’s consolidated results of operations, liquidity or financial condition.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

INFORMATION ABOUT OUR EXECUTIVE OFFICERS

 

The following table sets forth certain information with respect to the executive officers of the Company as of January 31, 2024: 

 

Name

 

Age

 

Office

 

Date Elected to

Executive Office

Position

Jeffrey S. Gorman

 

71

 

Executive Chairman

 

1998

Scott A. King

 

49

 

President and Chief Executive Officer

 

2019

James C. Kerr

 

61

 

Executive Vice President and Chief Financial Officer

 

2017

Brigette A. Burnell

 

48

 

Executive Vice President, General Counsel and Corporate Secretary

 

2014

 

Mr. Gorman was elected Executive Chairman effective January 1, 2022 after previously serving as Chairman of the Board since April 25, 2019, Chief Executive Officer from May 1, 1998 to December 31, 2021 and as President from 1998 to 2020 after having served as Senior Vice President since 1996. Mr. Gorman also held the position of General Manager of the Gorman-Rupp Pumps USA division from 1989 through 2005. He served as Assistant General Manager from 1986 to 1988; and he held the office of Corporate Secretary from 1982 to 1990. He has served as a Director of the Company continuously since 1989.

 

Mr. King was elected Chief Executive Officer effective January 1, 2022 in addition to his role as President. Mr. King served as President and Chief Operating Officer since January 1, 2021 after previously serving as Vice President and Chief Operating Officer since April 25, 2019. Mr. King also previously served as Vice President of Operations effective March 1, 2018 and as Vice President from April 1, 2017 to February 28, 2018. Mr. King previously held positions with the Gorman-Rupp Pumps USA division of the Company as Vice President and General Manager from January 1, 2014 until March 31, 2017, Vice President of Operations from June 1, 2010 until December 31, 2013, Director of Manufacturing from July 1, 2007 until May 31, 2010 and Manufacturing Manager from November 1, 2004 until June 30, 2007. He has served as a Director of the Company continuously since 2021.

 

Mr. Kerr was elected Executive Vice President and Chief Financial Officer effective January 1, 2021 after previously serving as Vice President and Chief Financial Officer since March 1, 2018. Mr. Kerr previously served as Chief Financial Officer effective January 1, 2017 and as Vice President of Finance from July 18, 2016 to December 31, 2016. Prior to 2016, Mr. Kerr served as both Executive Vice President and Chief Financial Officer of Jo-Ann Stores from 2006 to 2015 and as Vice President, Controller of Jo-Ann Stores from 1998 to 2006.

 

Ms. Burnell was elected Executive Vice President, General Counsel and Corporate Secretary effective March 1, 2022 after previously serving as Senior Vice President, General Counsel and Corporate Secretary since January 1, 2021. Ms. Burnell previously served as Vice President, General Counsel and Corporate Secretary effective March 1, 2018, General Counsel effective May 1, 2015, and as Corporate Secretary effective May 1, 2014. Ms. Burnell previously served as Corporate Counsel effective May 1, 2014. Ms. Burnell joined the Company as Corporate Attorney on January 2, 2014. Prior to 2014, Ms. Burnell served as Corporate Counsel of Red Capital Group from 2011 to 2013 and as an Associate at Jones Day from 2002 to 2011.

 

15

 

PART II

 

ITEM 5.         MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

The Company’s Common Stock is listed on the New York Stock Exchange under the ticker symbol “GRC”. On February 1, 2024, there were 1,615 registered holders of the Company’s common shares.

 

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 an assessment of the Company’s financial condition and business outlook at the applicable time.

 

PERFORMANCE GRAPH

 

The following stock price performance graph and related table compares the cumulative total returns (assuming reinvestment of dividends) on $100 invested on December 31, 2018 through December 31, 2023 in the Company’s common shares, the NYSE Composite Index, the NYSE American Index and a peer group of companies in the SIC Code 3561 Index — Pumps and Pumping Equipment. The stock price performance graph and related table is not necessarily indicative of future investment performance. This graph is not deemed to be “soliciting material” or “filed” with the SEC or subject to the liabilities of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the graph shall not be deemed to be incorporated by reference into any prior or subsequent filing by us under the Securities Act of 1933, as amended, or the Exchange Act.

 

performancegraph.jpg

 

 

   

2018

   

2019

   

2020

   

2021

   

2022

   

2023

 

The Gorman-Rupp Company

    100.00       117.66       103.69       144.85       85.19       121.06  

NYSE Composite

    100.00       125.74       134.53       162.35       147.17       167.44  

NYSE American

    100.00       113.72       105.18       152.68       184.22       204.67  

SIC Code 3561

    100.00       130.86       154.18       180.36       164.11       188.23  

 

16

 

PURCHASES OF EQUITY SECURITIES

(Amounts in tables in thousands of dollars, except share and per share data)

 

On October 29, 2021, the Company announced a share repurchase program of up to $50.0 million of the Company’s common shares. Shares may be repurchased from time to time by the Company through a variety of methods, which may include open-market transactions, pre-set trading plans designed in accordance with Rule 10b5-1, privately negotiated transactions, accelerated share repurchase transactions, or any combination of such methods. 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. The program does not have an expiration date.

 

Period

 

Total number

of shares

purchased

   

Average

price paid

per share

   

Total number of

shares purchased

as part of publicly

announced

program

   

Approximate dollar

value of shares that

may yet be

purchased under

the program

 

October 1 to October 31, 2023

    -       -       -     $ 48,067  

November 1 to November 30, 2023

    -       -       -       48,067  

December 1 to December 31, 2023

    -       -       -       48,067  

Total

    -       -       -     $ 48,067  

 

ITEM 6. RESERVED

 

17

 

 

ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

(Amounts in tables in thousands of dollars, except for per share data)

 

Executive Overview

 

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 suppression, 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.

 

On May 31, 2022, the Company acquired the assets of Fill-Rite and Sotera (“Fill-Rite”), a division of Tuthill Corporation, for $528.0 million. When adjusted for approximately $80.0 million in expected tax benefits, the net transaction value is approximately $448.0 million. The Company funded the transaction with cash on-hand and new debt. The Company incurred $7.1 million of one-time acquisition costs during the year ended December 31, 2022. The results of operations for Fill-Rite from the acquisition date going forward are included in the Company’s Consolidated Statements of Income.

 

The Company’s backlog of orders was $218.1 million at December 31, 2023 compared to $267.4 million at December 31, 2022, a decrease of 18.4%. The backlog was reduced from record levels towards the end of 2022 and beginning of 2023. The backlog aging in 2023 was consistent with historical levels. Approximately 90% of the Company’s backlog of unfilled orders is scheduled to be shipped during 2024, with the remainder principally during the first half of 2025.

 

Incoming orders for the year ending December 31, 2023, were $617.6 million, an increase of 4.4%, compared to 2022.

 

On January 25, 2024, the Board of Directors authorized the payment of a quarterly dividend of $0.18 per share, representing the 296th consecutive quarterly dividend to be paid by the Company. During 2023, the Company again paid increased dividends and thereby attained its 51st consecutive year of increased dividends. These consecutive years of increases continue to position Gorman-Rupp in the top 50 of all U.S. public companies with respect to number of years of increased dividend payments. The regular dividend yield at December 31, 2023 was 2.0%.

 

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

 

Our backlog has come down from the record levels that we saw in early 2023 but remains elevated as we enter 2024. We expect backlog to return to more normal levels during 2024. Our diverse markets continue to be a strength and we remain well positioned to benefit from infrastructure spending and the increased demand for flood control and storm water management. 

 

18

 

Results of Operations Year ended December 31, 2023 compared to year ended December 31, 2022:

 

Net Sales

 

End Market

 

2023

   

2022

   

$ Change

   

% Change

 

Industrial

  $ 136,978     $ 100,826     $ 36,152       35.9 %

Fire

    143,551       121,001       22,550       18.6 %

Agriculture

    83,053       57,703       25,350       43.9 %

Construction

    86,996       60,557       26,439       43.7 %

Municipal

    78,528       69,726       8,802       12.6 %

Petroleum

    23,168       16,464       6,704       40.7 %

OEM

    37,708       34,820       2,888       8.3 %

Repair parts

    69,529       59,930       9,599       16.0 %

Total net sales

  $ 659,511     $ 521,027     $ 138,484       26.6 %

 

Net sales for 2023 of $659.5 million increased 26.6% or $138.5 million compared to net sales of $521.0 million in 2022. The increase in sales was due to the inclusion of a full year of Fill-Rite sales compared to seven months of sales included in the prior year as well as an increase in volume and the impact of pricing increases taken in 2022 and an annual price increase in the first quarter of 2023. The Company’s two price increases in 2022, as well as the price increase in 2023 averaged between 4%-5%. Domestic sales increased 30.4% or $116.1 million and international sales increased 16.0% or $22.4 million compared to 2022.

 

Sales increased $36.2 million in the industrial market primarily due to the inclusion of a full year of Fill-Rite sales in 2023 compared to seven months of sales included in the prior year. In addition to the increase from Fill-Rite, industrial sales increased $14.2 million due to the strengthening in the broader industrial economy. Sales increased $25.4 million in the agriculture market due entirely to the inclusion of a full year of Fill-Rite sales compared to seven months of sales in the prior year. Sales increased $26.4 million in the construction market primarily due to the inclusion of a full year of Fill-Rite sales compared to seven months of sales included in the prior year. In addition to the increase from Fill-Rite, construction sales increased $8.9 million due to overall strong conditions including infrastructure related projects. Sales increased $22.6 million in the fire market primarily from increased domestic commercial construction, $9.6 million in the repair market due to strengthening in the broader industrial economy, $8.8 million in the municipal market due to domestic flood control and wastewater projects related to increased infrastructure investment, and $2.8 million in the OEM market. Sales in the petroleum market increased $6.7 million primarily due to the inclusion of a full year of Fill-Rite sales compared to seven months of sales included in the prior year as well as increased demand for larger petroleum transfer pumps.

 

Cost of Products Sold and Gross Profit

 

   

2023

   

2022

   

$ Change

   

% Change

 

Cost of products sold

  $ 463,258     $ 390,090     $ 73,168       18.8 %

% of Net sales

    70.2 %     74.9 %                

Gross margin

    29.8 %     25.1 %                

 

Gross profit was $196.3 million for 2023, resulting in gross margin of 29.8%, compared to gross profit of $130.9 million and gross margin of 25.1% in 2022. The 470 basis point increase in gross margin included a 380 basis point improvement in cost of material, which consisted of a favorable LIFO impact of 240 basis points, a favorable impact of 30 basis points related to the Fill-Rite inventory step-up that was recognized in 2022 that did not recur in 2023 and a 110 basis point improvement from the realization of selling price increases. The increase in gross margin also included a 90 basis point improvement on labor and overhead leverage due to increased sales volume and sales mix which includes a full year of Fill-Rite sales in 2023 compared to seven months in 2022.

 

19

 

For further discussion on the LIFO inventory costing method, see Note 1 “Summary of Significant Accounting Policies” and Note 4 “Inventories” in the Notes to our Consolidated Financial Statements.

 

 

Selling, General and Administrative (SG&A) Expenses

 

   

2023

   

2022

   

$ Change

   

% Change

 

Selling, general and administrative expenses

  $ 96,660     $ 83,117     $ 13,543       16.3 %

% of Net sales

    14.7 %     16.0 %                

 

Selling, general and administrative (“SG&A”) expenses were $96.7 million and 14.7% of net sales in 2023 compared to $83.1 million and 16.0% of net sales in 2022. SG&A expenses in 2022 included $7.1 million of one-time acquisition costs. Excluding acquisition costs of $7.1 million, SG&A expenses were $76.0 million and 14.6% of net sales in 2022. The increase in SG&A expenses, excluding acquisition costs, was due to the inclusion of Fill-Rite expenses for the full year in 2023 as compared to seven months in 2022, as well as increased expenses to support sales growth.

 

 

Amortization Expense

 

   

2023

   

2022

   

$ Change

   

% Change

 

Amortization expense

  $ 12,552     $ 7,637     $ 4,915       64.4 %

% of Net sales

    1.9 %     1.5 %                

 

Amortization expense was $12.6 million in 2023 compared to $7.6 million in 2022. The increase in amortization expense was due to the inclusion of a full year of amortization attributable to the Fill-Rite acquisition in 2023 compared to seven months in 2022.

 

 

Operating Income

 

   

2023

   

2022

   

$ Change

   

% Change

 

Operating Income

  $ 87,041     $ 40,183     $ 46,858       116.6 %

% of Net sales

    13.2 %     7.7 %                

 

Operating income was $87.0 million in 2023, resulting in an operating margin of 13.2%, compared to operating income of $40.2 million and operating margin of 7.7% in 2022. Operating income in 2022 included $7.1 million of one-time acquisition costs, and $1.4 million of inventory step-up amortization. Excluding acquisition costs and inventory step-up totaling $8.5 million, operating income was $48.7 million in 2022 resulting in an operating margin of 9.3% of net sales. Operating margin in 2023 increased 390 basis points compared to 2022, excluding acquisition costs and inventory step-up in 2022, due to improved margin on material costs, and improved leverage on SG&A expense due to increased sales volumes partially offset by increased amortization expense.

 

 

Interest Expense

 

   

2023

   

2022

   

$ Change

   

% Change

 

Interest Expense

  $ 41,273     $ 19,240     $ 22,033       114.5 %

% of Net sales

    6.3 %     3.7 %                

 

Interest expense was $41.3 million in 2023 compared to $19.2 million in 2022. The increase in interest expense was primarily due to the inclusion of a full year of interest expense in 2023 compared to seven months in 2022 on the debt financing attributable to the Fill-Rite acquisition, as well as increased interest rates in 2023 as compared to 2022.

 

20

 

Other Income (Expense), net

 

   

2023

   

2022

   

$ Change

   

% Change

 

Other income (expense), net

  $ (1,807 )   $ (7,071 )   $ 5,264       74.4 %

% of Net sales

    -0.3 %     -1.4 %                

 

Other income (expense), net was $1.8 million of expense in 2023 compared to $7.1 million of expense in 2022. The $7.1 million of expense in 2022 included non-cash pension settlement charges of $6.4 million, which did not recur in 2023.

 

Net Income

 

   

2023

   

2022

   

$ Change

   

% Change

 

Income before income taxes

  $ 43,961     $ 13,872     $ 30,089       216.9  %

% of Net sales

    6.7 %     2.7 %                

Income taxes

  $ 9,010     $ 2,677     $ 6,333       236.6  %

Effective tax rate

  20.5 %   19.3 %                

Net income

  $ 34,951     $ 11,195     $ 23,756       212.2  %

% of Net sales

    5.3 %     2.1 %                

Earnings per share

  $ 1.34     $ 0.43     $ 0.91       211.6  %

 

Net income was $35.0 million, or $1.34 per share, in 2023 compared to net income of $11.2 million, or $0.43 per share in 2022. Adjusted earnings per share in 2023 were $1.37 per share compared to $0.94 per share in 2022. Adjusted earnings per share in 2023 included an unfavorable LIFO impact of $0.21 per share compared to an unfavorable LIFO impact of $0.56 per share in 2022. Adjusted earnings per share is a non-GAAP financial measure- please see “Non-GAAP Financial Information” below.

 

The Company’s effective tax rate was 20.5% for 2023 compared to 19.3% for 2022. The effective tax rate for 2022 was impacted by similar benefits from credits and permanent items as the prior year on lower pretax income. We expect our effective tax rate for 2024 to be between 20.0% and 22.0%.

 

Results of Operations Year ended December 31, 2022 compared to year ended December 31, 2021:

 

Information pertaining to fiscal year 2021 was included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 beginning on page 15 under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which was filed with the SEC on February 28, 2022.

 

Non-GAAP Financial Information:

 

The discussion of Results of Operations above includes certain non-GAAP financial data and measures such as adjusted earnings, adjusted earnings per share, and adjusted earnings before interest, taxes, depreciation and amortization.  Adjusted earnings is earnings excluding non-cash pension settlement charges, one-time acquisition costs, amortization of step up in value of acquired inventories, and amortization of customer backlog. Adjusted earnings per share 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. Adjusted earnings before interest, taxes, depreciation and amortization 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, amortization of customer backlog, and non-cash LIFO expense. 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. Further, the impact of the LIFO inventory costing method can cause results to vary substantially from company to company depending upon whether they elect to utilize LIFO and depending upon which method they may elect. The Gorman-Rupp 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, adjusted earnings per share, and adjusted earnings before interest, taxes, depreciation and amortization.

 

21

 

   

2023

   

2022

   

2021

 

Adjusted earnings:

                       

Reported net income – GAAP basis

  $ 34,951     $ 11,195     $ 29,851  

Pension settlement charge

    -       5,216       1,846  

One-time acquisition costs

    -       5,752       -  

Amortization of step up in value of acquired inventories

    -       1,141       -  

Amortization of acquired customer backlog

    863       1,231       -  

Non-GAAP adjusted earnings

  $ 35,814     $ 24,535     $ 31,697  

 

   

2023

   

2022

   

2021

 

Adjusted earnings per share:

                       

Reported earnings per share - GAAP basis

  $ 1.34     $ 0.43     $ 1.14  

Pension settlement charge

    -       0.20       0.07  

One-time acquisition costs

    -       0.22       -  

Amortization of step up in value of acquired inventories

    -       0.04       -  

Amortization of acquired customer backlog

    0.03       0.05       -  

Non-GAAP adjusted earnings per share

  $ 1.37     $ 0.94     $ 1.21  

 

   

2023

   

2022

   

2021

 

Adjusted earnings before interest, taxes, depreciation and amortization:

                       

Reported net income - GAAP basis

  $ 34,951     $ 11,195     $ 29,851  

Interest expense

    41,273       19,240       1  

Provision for income taxes

    9,010       2,677       7,397  

Depreciation and amortization

    28,496       21,158       11,914  

Non-GAAP earnings before interest, taxes, depreciation and amortization

    113,730       54,270       49,163  

Pension settlement charge

    -       6,427       2,304  

One-time acqusition costs

    -       7,088       -  

Amortization of step up in value of acquired inventories

    -       1,406       -  

Amortization of acquired customer backlog

    1,085       1,517       -  

Non-cash LIFO expense

    6,891       18,041       6,669  

Non-GAAP adjusted earnings before interest, taxes, depreciation and amortization

  $ 121,706     $ 88,749     $ 58,136  

 

Liquidity and Capital Resources

 

Our primary sources of liquidity are cash generated from operations and borrowings under our revolving credit facility. Cash and cash equivalents totaled $30.5 million at December 31, 2023. The Company had an additional $98.0 million available under the revolving credit facility after deducting $2.0 million in outstanding letters of credit primarily related to customer orders. See Note 5 “Financing Arrangements” in the Notes to our Consolidated Financial Statements.

 

22

 

As of December 31, 2023, the Company had $413.8 million in total debt outstanding due in 2027. The Company was in compliance with its debt covenants, including limits on additional borrowings and maintenance of certain operating and financial ratios, at December 31, 2023.

 

Capital expenditures in 2023 were $20.8 million and consisted primarily of machinery and equipment and building improvements. Capital expenditures for 2024, which are expected to consist principally of machinery and equipment purchases, are estimated to be in the range of $18 - $20 million and are expected to be financed through internally generated funds. During 2023, 2022 and 2021, the Company financed its capital improvements and working capital requirements principally through internally generated funds.

 

The Company contributed $2.3 million to its defined benefit pension plans in 2023 and expects to contribute up to $3.0 million to its defined benefit pension plans in 2024.

 

Financial Cash Flow

 

   

Year Ended December 31,

 
   

2023

   

2022

   

2021

 

Beginning of period cash and cash equivalents

  $ 6,783     $ 125,194     $ 108,203  

Net cash provided by operating activities

    98,225       13,685       45,438  

Net cash used for investing activities

    (20,163 )     (545,673 )     (9,169 )

Net cash received from (used for) financing activities

    (54,527 )     414,113       (18,553 )

Effect of exchange rate changes on cash

    200       (536 )     (725 )

Net increase (decrease) in cash and cash equivalents

    23,735       (118,411 )     16,991  

End of period cash and cash equivalents

  $ 30,518     $ 6,783     $ 125,194  

 

The increase in cash provided by operating activities in 2023 compared to 2022 was primarily due to increased earnings before depreciation, amortization, and LIFO expense, and improved cash flow from working capital management. The decrease in cash provided by operating activities in 2022 compared to 2021 was primarily due to interest expense of $19.2 million and acquisition costs of $7.1 million as well as increases in accounts receivable and inventory as the result of increased sales and backlog. In addition, cash flow from accounts payable decreased $11.0 million from 2021 to 2022 and deferred revenue and customer deposits have decreased in the current year compared to an increase in the prior year.

 

During 2023, net cash used for investing activities of $20.2 million consisted primarily of $20.8 million used for capital expenditures, largely related to machinery and equipment. During 2022, net cash used for investing activities of $545.7 million consisted primarily of $528.0 million for the acquisition of Fill-Rite and $18.0 million for capital expenditures largely related to machinery and equipment. During 2021, net cash used for investing activities of $9.2 million consisted primarily of capital expenditures of $9.8 million, largely related to machinery and equipment.

 

During 2023, net cash used for financing activities of $54.5 million consisted primarily of net payments on bank borrowings of $34.5 million, dividend payments of $18.4 million and $1.0 million of payments in the surrender of common shares to cover taxes upon the vesting of stock awards. During 2022, net cash received from financing activities of $414.1 million consisted primarily of proceeds from the Senior Secured Term Loan Facility of $350.0 million, $90.0 million from the unsecured Subordinated Credit Facility, and $17.0 million from the revolving Credit Facility. Partially offsetting these proceeds were debt issuance fees paid of $15.2 million, dividend payments of $17.9 million, payments on borrowings of $8.9 million and share repurchases of $0.9 million during 2022. During 2021, net cash used for financing activities of $18.6 million consisted primarily of dividend payments of $16.6 million and open market share repurchases of $1.2 million. See Note 5 “Financing Arrangements” in the Notes to our Consolidated Financial Statements.

 

23

 

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

 

2024

   

2025

   

2026

   

2027

   

2028

   

Total

 
$ 21,875     $ 30,625     $ 35,000     $ 326,250     $ -     $ 413,750  

 

The Company was in compliance with its debt covenants, including limits on additional borrowings and maintenance of certain operating and financial ratios at December 31, 2023 and December 31, 2022. 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 obligation and financial covenants for at least 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, of which approximately $48.1 million has yet to be repurchased. 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.

 

Contractual Obligations

 

Capital commitments in the table below include contractual commitments to purchase machinery and equipment that have been approved by the Board of Directors. The capital commitments do not represent the entire anticipated purchases in the future but represent only those substantive items for which the Company is contractually obligated as of December 31, 2023. Also, the Company has operating leases and financing leases for certain offices, manufacturing facilities, land, office equipment and automobiles. Rental expenses relating to these leases were $2.8 million in 2023, $1.4 million in 2022, and $0.9 million in 2021.

 

The following table summarizes the Company’s contractual obligations at December 31, 2023:

 

 

   

Payment Due By Period

 
   

Total

   

Less than

1 Year

   

1-3
Years

   

3-5
Years

   

More than
5 Years

 

Capital commitments

  $ 3,616     $ 3,616     $ -     $ -     $ -  

Leases

    40,552       2,501       5,230       3,330       29,491  

Total

  $ 44,168     $ 6,117     $ 5,230     $ 3,330     $ 29,491  

 

Critical Accounting Policies

 

The accompanying Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States. When more than one accounting principle, or the method of its application, is generally accepted, management selects the principle or method that is appropriate in the Company’s specific circumstances. Application of these accounting principles requires management to make estimates about the future resolution of existing uncertainties; as a result, actual results could differ from these estimates.

 

In preparing these Consolidated Financial Statements, management has made its best estimates and judgments of the amounts and disclosures included in the Consolidated Financial Statements, giving due regard to materiality. The Company does not believe there is a great likelihood that materially different amounts would be reported under different conditions or using different assumptions pertaining to the accounting policies described below.

 

24

 

Revenue Recognition

 

The Company accounts for revenue in accordance with Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with Customers,” under which the unit of account is a performance obligation. Substantially all of our revenue is derived from fixed-price customer contracts and the majority of our customer contracts have a single performance obligation. A performance obligation is a promise in a contract to transfer a distinct good or service to a customer. For customer contracts with multiple performance obligations, the Company allocates revenue to each performance obligation based on its relative standalone selling price, which is generally determined based on standalone selling prices charged to customers or using expected cost plus margin.

 

The transaction price for a customer contract is allocated to each distinct performance obligation and recognized as revenue when, or as, the Company’s performance obligation is satisfied. All of the Company's performance obligations, and associated revenue, are generally satisfied at a point in time, with the exception of certain highly customized pump products, which are satisfied over time as work progresses.

 

Accounting for long-term contracts involves the use of various techniques to estimate total contract revenue and costs. For long-term contracts, the Company estimates the profit on a contract as the difference between the total estimated revenue and expected costs to complete a contract and recognizes that profit as performance obligations are satisfied. Contract estimates are based on various assumptions to project the outcome of future events that could span longer than one year. These assumptions include labor productivity and availability, the complexity of the work to be performed, the cost and availability of materials and the performance of subcontractors as applicable.

 

As a significant change in one or more of these estimates could affect the profitability of our contracts, the Company reviews and updates its contract-related estimates regularly. Adjustments in estimated profit on contracts are accounted for under the cumulative catch-up method. Under this method, the impact of the adjustment on profit recorded to date on a contract is recognized in the period the adjustment is identified. Revenue and profit in future periods of contract performance are recognized using the adjusted estimate.

 

Inventories and Related Allowance

 

Inventories are valued at the lower of cost or market value and have been reduced by an allowance for excess and obsolete inventories. The estimated allowance is based on a variety of factors, including historical inventory usage and management evaluations. Historically, the Company has not experienced substantive write-offs due to obsolescence. The Company uses the last-in, first-out (LIFO) method for the majority of its inventories.

 

Pension Plans and Other Postretirement Benefit Plans

 

The Company recognizes the obligations associated with its defined benefit pension plans and defined benefit health care plans in its Consolidated Financial Statements. The measurement of liabilities related to its pension plans and other postretirement benefit plans is based on management’s assumptions related to future events including interest rates, return on pension plan assets, rate of compensation increases and health care cost trend rates. Actual pension plan asset performance will either reduce or increase pension losses included in accumulated other comprehensive loss, which ultimately affects net income. The discount rates used to determine the present value of future benefits are based on estimated yields of investment grade fixed income investments.

 

The discount rates used to value pension plan obligations were 4.7% at December 31, 2023 and 4.9% at December 31, 2022, respectively. The discount rates used to value postretirement obligations were 4.9% at December 31, 2023 and 5.2% at December 31, 2022, respectively. The discount rates were determined by constructing a zero-coupon spot yield curve derived from a universe of high-quality bonds as of the measurement date. The expected rate of return on pension assets is designed to be a long-term assumption that will be subject to year-to-year variability. The rate for 2023 was 6.2% and for 2022 was 5.0%. Actual pension plan asset performance will either reduce or increase unamortized losses included in Accumulated other comprehensive loss, which will ultimately affect net income. The assumed rate of compensation increase was 3.5% in both 2023 and 2022.

 

25

 

Substantially all retirees elect to take lump sum settlements of their pension plan benefits. When interest rates are low, this subjects the Company to the risk of exceeding an actuarial threshold computed on an annual basis and triggering a GAAP-required non-cash pension settlement loss, which occurred in 2023 and 2022.

 

The assumption used for the rate of increase in medical costs over the next five years was 5.0% in both 2023 and 2022.

 

Goodwill and Other Intangibles

 

The Company accounts for goodwill in a purchase business combination as the excess of the cost over the fair value of net assets acquired. Business combinations can also result in other intangible assets being recognized. Amortization of intangible assets, if applicable, occurs over their estimated useful lives.

 

Goodwill is tested annually for impairment as of October 1, or whenever events or changes in circumstances indicate there may be a possible permanent loss of value in accordance with ASC 350, “Intangibles - Goodwill and Other.”

 

Goodwill is tested for impairment at the reporting unit level and is based on the net assets for each reporting unit, including goodwill and intangible assets. The Company has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing a quantitative impairment assessment is unnecessary.

 

In assessing the qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we identify and assess relevant drivers of fair value and events and circumstances that may impact the fair value and the carrying amount of the reporting unit. The identification of relevant events and circumstances and how these may impact a reporting unit’s fair value or carrying amount involves significant judgments and assumptions. The judgments and assumptions include the identification of macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, Company-specific events and share price trends and making the assessment on whether each relevant factor will impact the impairment test positively or negatively and the magnitude of any such impact.

 

When performing a quantitative assessment of goodwill impairment if necessary, or in years where we elect to do so, a discounted cash flow model is used to estimate the fair value of each reporting unit, which considers forecasted cash flows discounted at an estimated weighted-average cost of capital. The forecasted cash flows are based on the Company’s long-term operating plan and the weighted-average cost of capital is an estimate of the overall after-tax rate of return. Other valuation techniques including comparative market multiples are used when appropriate. Discount rate assumptions are based on an assessment of the risk inherent in the future cash flows of the respective reporting units.

 

The Company performed qualitative analyses as of October 1, 2023 and 2022 for all of its reporting units except for National Pump Company (“National”) in 2023 and 2022 and Fill-Rite in 2023 concluding that it was more likely than not that the fair value of the reporting units exceeded the respective carrying amounts.

 

The Company performed a quantitative impairment analysis as of October 1, 2023 for National and Fill-Rite reporting units and concluded that the fair value of each reporting unit exceeded its carrying value and therefore was not impaired. A sensitivity analysis was performed for each reporting unit, assuming a hypothetical 100 basis point decrease in the expected long-term growth rate or a hypothetical 100 basis point increase in the weighted average cost of capital, and both scenarios independently yielded an estimated fair value above carrying value. If National or Fill-Rite fail to experience growth or revise their long-term projections downward, they could be subject to impairment charges in the future. Goodwill relating to the National reporting unit is $13.6 million, or 1.5% of the Company’s December 31, 2023 total assets, and goodwill relating to the Fill-Rite reporting unit is $230.7 million, or 25.9% of the Company’s December 31, 2023 total assets. See Note 10 to the Consolidated Financial Statements, “Goodwill and Other Intangible Assets”.

 

26

 

Other indefinite-lived intangible assets primarily consist of trademarks and trade names. The fair value of these assets is also tested annually for impairment as of October 1, or whenever events or changes in circumstances indicate there may be a possible permanent loss of value. The fair value of these assets is determined using a royalty relief methodology similar to that employed when the associated assets were acquired, but using updated estimates of future sales, cash flows and profitability. For 2023 and 2022, the fair value of all indefinite lived intangible assets exceeded the respective carrying values.

 

Finite-lived assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount may not be recovered through future net cash flows generated by the assets. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to future net undiscounted cash flows estimated to be generated by such assets. The Company was not aware of any events or changes in circumstances that indicate the carrying value of its finite-lived assets may not be recoverable. See Note 10 to the Consolidated Financial Statements, Goodwill and Other Intangible Assets.

 

Acquisitions

 

The Company allocates the purchase price of its acquisitions to the assets acquired, liabilities assumed, and noncontrolling interests based upon their respective fair values at the acquisition date. The Company utilizes management estimates and inputs from an independent third-party valuation firm to assist in determining these fair values.

 

The Company uses the income, market or cost approach (or a combination thereof) for the valuation as appropriate. The valuation inputs in these models and analyses are based on market participant assumptions. Management values property, plant and equipment using the cost approach supported where available by observable market data, which includes consideration of obsolescence. Management values acquired intangible assets using the relief from royalty method or excess earnings method, which are forms of the income approach supported by observable market data for peer companies. The significant assumptions used to estimate the value of the acquired intangible assets include discount rates and certain assumptions that form the basis of future cash flows (such as revenue growth rates, EBITDA margins, customer attrition rates, and royalty rates), which are considered Level 3 assets as the assumptions are unobservable inputs developed by the Company. Acquired inventories are recorded at fair value. For certain items, the carrying value is determined to be a reasonable approximation of fair value based on information available to the Company.

 

The excess of the acquisition price over estimated fair values is recorded as goodwill. Goodwill is adjusted for any changes to acquisition date fair value amounts made within the measurement period. Acquisition-related transaction costs are recognized separately from the business combination and expensed as incurred. See Note 2 to the Consolidated Financial Statements, “Acquisitions”.

 

Other Matters

 

Certain transactions with related parties occur in the ordinary course of business and are not considered to be material to the Company’s consolidated financial position, net income or cash flows.

 

The Company does not have any off-balance sheet arrangements, financings or other relationships with unconsolidated “special purpose entities.”

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The Company is 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.

 

27

 

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, revolving credit facility, and subordinated credit facility. Borrowings under the senior term loan facility and revolving 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 December 31, 2023, the Company had $323.8 million in borrowings under the senior term loan facility, $90.0 million in borrowings under the subordinated credit facility, and no borrowings under the revolving credit facility. See Note 5 “Financing Arrangements” in the Notes to our Consolidated Financial Statements. 

 

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. See “Derivative Financial Instruments” and “Interest Rate Derivatives” in the Notes to our Consolidated Financial Statements. 

 

The Company estimates that a hypothetical increase of 100 basis points in interest rates would increase interest expense by approximately $2.5 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 2023 and 2022 were $(0.4) million and $0.2 million, respectively, and are reported within Other (expense) income, net on the Consolidated Statements of Income. There were no net foreign currency transaction gains (losses) for the period ending December 31, 2021.

 

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Report of Independent Registered Public Accounting Firm

 

To the Shareholders and the Board of Directors of The Gorman-Rupp Company

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of The Gorman-Rupp Company (the Company) as of December 31, 2023 and 2022, the related consolidated statements of income, comprehensive income, equity and cash flows for each of the three years in the period ended December 31, 2023, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with U.S. generally accepted accounting principles.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 26, 2024 expressed an unqualified opinion thereon.

 

28

 

Basis for Opinion

 

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

Critical Audit Matters

 

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which they relate.

 

Fill-Rite Goodwill Impairment Evaluation 

 

Description of the Matter         

At December 31, 2023, the Company’s total goodwill was $257.7 million, of which, $230.7 million related to the Fill-Rite reporting unit. As discussed in Note 1 and Note 10 of the consolidated financial statements, goodwill is tested for impairment at least annually on October 1 at the reporting unit level, or when events or circumstances occur that would more likely than not reduce the fair value of a reporting unit below its carrying amount. For 2023, the Company used a quantitative analysis for the annual goodwill impairment testing for its Fill-Rite reporting unit. The Company uses an income and market approach in its quantitative impairment tests.

   
 

Auditing the Company’s Fill-Rite quantitative goodwill impairment evaluation was complex and highly judgmental due to the significant estimation required in determining the fair value of the reporting unit. In particular, the fair value estimate using the income approach was sensitive to significant assumptions such as the discount rate, discrete revenue growth rates, and profitability assumptions. Elements of these significant assumptions are forward-looking and could be affected by future economic conditions and/or changes in consumer preferences.

 

29

 

How We Addressed the

Matter in Our Audit

We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s Fill-Rite reporting unit goodwill impairment review process, including controls over the significant assumptions mentioned above.

   
 

To test the estimated fair value used in the Company’s Fill-Rite reporting unit goodwill impairment analysis, we performed audit procedures that included, among others, assessing fair value methodologies and testing the significant assumptions discussed above and the underlying data used by the Company in its analysis. For example, we compared the significant assumptions used by management to current industry and economic trends, changes to the Company’s business model, and other relevant factors. We assessed the historical accuracy of management’s estimates. We also performed sensitivity analyses of significant assumptions, including the discount rate, discrete revenue growth rates, and profitability assumptions, to evaluate the changes in fair value that would result from changes in the assumptions and the potential impact on the Company’s conclusion of whether or not the goodwill was impaired. In addition, we involved our valuation specialist to assist with our evaluation of the methodology used by the Company and significant assumptions, including, among others, the discount rate.

 

/s/ Ernst & Young LLP

We have served as the Company’s auditor since at least 1967, but we are unable to determine the specific year.

 

Cleveland, Ohio

February 26, 2024

 

30

 

 

 

The Gorman-Rupp Company

 

Consolidated Statements of Income

 

   

Year Ended December 31,

 

(Dollars in thousands, except share and per share amounts)

 

2023

   

2022

   

2021

 
                         

Net sales

  $ 659,511     $ 521,027     $ 378,316  

Cost of products sold

    463,258       390,090       282,419  

Gross profit

    196,253       130,937       95,897  

Selling, general and administrative expenses

    96,660       83,117       56,004  

Amortization expense

    12,552       7,637       537  

Operating income

    87,041       40,183       39,356  

Interest expense

    (41,273 )     (19,240 )     -  

Other income (expense), net

    (1,807 )     (7,071

)

    (2,108 )

Income before income taxes

    43,961       13,872       37,248  

Provision from income taxes

    9,010       2,677       7,397  

Net income

  $ 34,951     $ 11,195     $ 29,851  
                         

Earnings per share

  $ 1.34     $ 0.43     $ 1.14  

Average number of shares outstanding.

    26,174,174       26,089,976       26,119,376  

 

See notes to consolidated financial statements.

 

 

Consolidated Statements of Comprehensive Income

 

   

Year Ended December 31,

 

(Dollars in thousands)

 

2023

   

2022

   

2021

 
                         

Net income

  $ 34,951     $ 11,195     $ 29,851  
                         

Cumulative translation adjustments

    931       (2,768 )     (2,807 )

Cash flow hedging activity

    (452 )     (617 )     -  

Pension and postretirement medical

                       

liability adjustments, net of tax

    (942 )     9,241       2,854  

Other comprehensive income (loss)

    (463 )     5,856       47  

Comprehensive income

  $ 34,488     $ 17,051     $ 29,898  

 

See notes to consolidated financial statements.

 

31

 

 

 

The Gorman-Rupp Company

Consolidated Balance Sheets

 

   

December 31,

 

(Dollars in thousands)

 

2023

   

2022

 
Assets                 

Current assets:

               

Cash and cash equivalents

  $ 30,518     $ 6,783  

Accounts receivable, net

    89,625       93,059  

Inventories, net

    104,156       111,133  

Prepaid and other

    11,812       14,551  

Total current assets

    236,111       225,526  

Property, plant and equipment, net

    134,872       128,640  

Other assets

    24,841       11,579  

Other intangible assets, net

    236,813       249,361  

Goodwill

    257,721       257,724  

Total assets

  $ 890,358     $ 872,830  
                 

Liabilities and equity

               

Current liabilities:

               

Accounts payable

  $ 23,277     $ 24,697  

Payroll and employee related liabilities

    20,172       17,132  

Commissions payable

    10,262       10,116  

Deferred revenue and customer deposits

    12,521       6,740  

Current portion of long-term debt

    21,875       17,500  

Accrued expenses

    12,569       9,028  

Total current liabilities

    100,676       85,213  

Pension benefits

    11,500       9,352  

Postretirement benefits

    22,786       22,413  

Long-term debt, net of current portion

    382,579       419,327  

Other long-term liabilities

    23,358       5,331  

Total liabilities

    540,899       541,636  
Equity:                 
Common shares,

without par value:

               
Authorized - 35,000,000 shares;                

Outstanding – 26,193,998 shares at December 31, 2023 and 26,094,865 shares at December 31, 2022 (after deducting treasury shares of 854,798 and 953,931, respectively), at stated capital amounts

    5,119       5,097  

Additional paid-in capital

    5,750       3,912  

Retained earnings

    363,527       346,659  

Accumulated other comprehensive loss

    (24,937 )     (24,474

)

Total equity

    349,459       331,194  

Total liabilities and equity

  $ 890,358     $ 872,830  

 

See notes to consolidated financial statements.

 

32

 

 

The Gorman-Rupp Company

Consolidated Statements of Cash Flows

 

   

Year Ended December 31,

 

(Dollars in thousands)

 

2023

   

2022

   

2021

 

Cash flows from operating activities:

                       

Net income

  $ 34,951     $ 11,195     $ 29,851  

Adjustments to reconcile net income to net cash provided by operating activities:

                       

Depreciation and amortization

    28,496       21,158       11,914  

LIFO expense

    6,891       18,041       6,669  

Pension expense

    3,604       9,985       4,989  

Contributions to pension plan

    (2,250 )     (2,250 )     (2,000 )

Stock based compensation

    3,252       2,957       2,396  

Amortization of debt issuance fees

    3,014       1,717       -  

Deferred income tax charge (benefit)

    (414 )     (1,086 )     50  

Other

    1,335       (128 )     (103 )

Changes in operating assets and liabilities, net of effects of acquisitions:

                       

Accounts receivable, net

    3,752       (13,954 )     (8,702 )

Inventories, net

    559       (32,772 )     (10,959 )

Accounts payable

    (1,518 )     (2,250 )     8,717  

Commissions payable

    9       2,051       2,718  

Deferred revenue and customer deposits

    5,773       (2,329 )     1,351  

Accrued expenses and other

    6,316       (954 )     (1,631 )

Income taxes

    1,226       1,907       -  

Benefit obligations

    3,229       397       178  

Net cash provided by operating activities

    98,225       13,685       45,438  
Cash flows from investing activities                        

Capital additions

    (20,835 )     (17,986 )     (9,751 )

Acquisitions

    -       (527,993 )     -  

Other

    672       306       582  

Net cash used for investing activities

    (20,163 )     (545,673 )     (9,169 )

Cash flows from financing activities:

                       

Cash dividends

    (18,447 )     (17,872 )     (16,586 )

Treasury share repurchases

    (1,029 )     (918 )     (1,245 )

Proceeds from bank borrowings

    5,000       457,000       -  

Payments to banks for borrowings

    (39,500 )     (8,750 )     -  

Debt issuance fees

    -       (15,217 )     -  

Other

    (551 )     (130 )     (722 )

Net cash provided by (used for) financing activities

    (54,527 )     414,113       (18,553 )

Effect of exchange rate changes on cash

    200       (536 )     (725 )

Net increase (decrease) in cash and cash equivalents

    23,735       (118,411 )     16,991  

Cash and cash equivalents:

                       

Beginning of year

    6,783       125,194       108,203  

End of period

  $ 30,518     $ 6,783     $ 125,194  

 

See notes to consolidated financial statements.

 

33

 

 

 

The Gorman-Rupp Company

 

Consolidated Statements of Equity

(Dollars in thousands, except share

 

Common Shares

   

Additional

Paid-In

    Retained     Accumulated

Other

Comprehensive

         
and per share amounts)  

Shares

   

Dollars

    Capital     Earnings     (Loss) Income    

Total

 

Balances December 31, 2020

    26,101,992     $ 5,099     $ 693     $ 340,098     $ (30,377 )   $ 315,513  
                                                 

Net income

                            29,851               29,851  
                                                 

Other comprehensive income

                                    47       47  
                                                 

Stock based compensation

    31,707       7       2,273       116               2,396  
                                                 

Treasury share repurchases

    (30,038 )     (7 )     (1,128 )     (110 )             (1,245 )
                                                 

Cash dividends - $0.64 per share

                            (16,586 )             (16,586 )
                                                 

Balances December 31, 2021

    26,103,661       5,099       1,838       353,369       (30,330 )     329,976  
                                                 

Net income

                            11,195               11,195  
                                                 

Other comprehensive income

                                    5,856       5,856  
                                                 

Stock based compensation

    15,750       3       2,896       58               2,957  
                                                 

Treasury share repurchases

    (24,546 )     (5 )     (822 )     (91 )             (918 )
                                                 

Cash dividends - $0.69 per share

                            (17,872 )             (17,872 )
                                                 

Balances December 31, 2022

    26,094,865       5,097       3,912       346,659       (24,474 )     331,194  
                                                 

Net income

                            34,951               34,951  
                                                 

Other comprehensive loss 

                                    (463 )     (463 )
                                                 

Stock based compensation

    135,238       30       2,727       496               3,253  
                                                 

Treasury share repurchases

    (36,105 )     (8 )     (889 )     (132 )             (1,029 )
                                                 

Cash dividends - $0.71 per share

                            (18,447 )             (18,447 )
                                                 

Balances December 31, 2023

    26,193,998     $ 5,119     $ 5,750     $ 363,527     $ (24,937 )   $ 349,459  

 

See notes to consolidated financial statements.

 

34

 

 

The Gorman-Rupp Company

 

Notes to Consolidated Financial Statements

(Amounts in tables in thousands of dollars)

 

 

Note 1 Summary of Significant Accounting Policies

 

General Information and Basis of Presentation