grc20230630_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended June 30, 2023

☐	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(s)	Name of each exchange on which registered
Common Shares, without par value	GRC	New York Stock Exchange

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. (Check one):

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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

On July 31, 2023 there were 26,193,998 common shares, without par value, of The Gorman-Rupp Company outstanding.

The Gorman-Rupp Company

Three and Six Months Ended June 30, 2023 and 2022

PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Consolidated Statements of Income - Three months ended June 30, 2023 and 2022 - Six months ended June 30, 2023 and 2022	3
	Consolidated Statements of Comprehensive Income - Three months ended June 30, 2023 and 2022 - Six months ended June 30, 2023 and 2022	3
	Consolidated Balance Sheets - June 30, 2023 and December 31, 2022	4
	Consolidated Statements of Cash Flows - Six months ended June 30, 2023 and 2022	5
	Consolidated Statements of Equity - Six months ended June 30, 2023 and 2022	6
	Notes to Consolidated Financial Statements (Unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	22
Item 4.	Controls and Procedures	23

PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	23
Item 1A.	Risk Factors	23
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	24
Item 3.	Defaults Upon Senior Securities	24
Item 4.	Mine Safety Information	24
Item 5.	Other Information	24
Item 6.	Exhibits	25
EX-31.1	Section 302 Principal Executive Officer (PEO) Certification
EX-31.2	Section 302 Principal Financial Officer (PFO) Certification
EX-32	Section 1350 Certifications

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

THE GORMAN-RUPP COMPANY

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

	Three Months Ended June 30,						Six Months Ended June 30,
(Dollars in thousands, except per share amounts)	2023			2022			2023			2022
Net sales	$	171,024		$	119,067		$	331,490		$	221,234
Cost of products sold		119,366			90,828			234,309			167,498
Gross profit		51,658			28,239			97,181			53,736
Selling, general and administrative expenses		24,193			24,114			47,430			39,936
Amortization expense		3,182			1,218			6,373			1,435
Operating income		24,283			2,907			43,378			12,365
Interest expense		(10,485	)		(2,322	)		(20,672	)		(2,322	)
Other income (expense), net		(536	)		(1,846	)		(969	)		(1,756	)
Income (loss) before income taxes		13,262			(1,261	)		21,737			8,287
Provision (benefit) from income taxes		2,785			(265	)		4,740			1,740
Net income (loss)	$	10,477		$	(996	)	$	16,997		$	6,547
Earnings (loss) per share	$	0.40		$	(0.04	)	$	0.65		$	0.25
Cash dividends per share	$	0.175		$	0.170		$	0.350		$	0.340
Average number of shares outstanding		26,178,248			26,079,115			26,154,196			26,085,006

See notes to consolidated financial statements (unaudited).

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

	Three Months Ended June 30,					Six Months Ended June 30,
(Dollars in thousands)	2023		2022			2023		2022
Net income (loss)	$	10,477	$	(996	)	$	16,997	$	6,547
Other comprehensive income (loss), net of tax:
Cumulative translation adjustments		23		(2,828	)		278		(2,864	)
Cash flow hedging activity		2,626		-			1,094		-
Pension and postretirement medical liability adjustments		233		1,663			366		2,086
Other comprehensive income (loss)		2,882		(1,165	)		1,738		(778	)
Comprehensive income (loss)	$	13,359	$	(2,161	)	$	18,735	$	5,769

See notes to consolidated financial statements (unaudited).

THE GORMAN-RUPP COMPANY

CONSOLIDATED BALANCE SHEETS

	(unaudited)
(Dollars in thousands)	June 30, 2023			December 31, 2022
Assets
Current assets:
Cash and cash equivalents	$	12,173		$	6,783
Accounts receivable, net		101,875			93,059
Inventories, net		115,816			111,133
Prepaid and other		10,957			14,551
Total current assets		240,821			225,526
Property, plant and equipment, net		136,047			128,640
Other assets		26,133			11,579
Other intangible assets, net		242,989			249,361
Goodwill		257,660			257,724
Total assets	$	903,650		$	872,830
Liabilities and equity
Current liabilities:
Accounts payable	$	29,161		$	24,697
Payroll and employee related liabilities		21,281			17,132
Commissions payable		10,352			10,116
Deferred revenue and customer deposits		9,097			6,740
Current portion of long-term debt		17,500			17,500
Accrued expenses		8,796			9,028
Total current liabilities		96,187			85,213
Pension benefits		10,368			9,352
Postretirement benefits		22,092			22,413
Long-term debt, net of current portion		411,405			419,327
Other long-term liabilities		22,239			5,331
Total liabilities		562,291			541,636
Equity:
Common shares, without par value:
Authorized - 35,000,000 shares;
Outstanding - 26,178,248 shares at June 30, 2023 and 26,094,865 shares at December 31, 2022 (after deducting treasury shares of 870,548 and 953,931, respectively), at stated capital amounts		5,115			5,097
Additional paid-in capital		4,165			3,912
Retained earnings		354,815			346,659
Accumulated other comprehensive (loss)		(22,736	)		(24,474	)
Total equity		341,359			331,194
Total liabilities and equity	$	903,650		$	872,830

See notes to consolidated financial statements (unaudited).

THE GORMAN-RUPP COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	Six Months Ended June 30,
(Dollars in thousands)	2023			2022
Cash flows from operating activities:
Net income	$	16,997		$	6,547
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		14,158			7,201
LIFO expense		4,440			6,004
Pension expense		1,617			3,357
Stock based compensation		1,606			1,413
Amortization of debt issuance fees		1,481			237
Other		30			-
Changes in operating assets and liabilities:
Accounts receivable, net		(8,645	)		(11,713	)
Inventories, net		(8,959	)		(10,687	)
Accounts payable		4,435			938
Commissions payable		142			392
Deferred revenue and customer deposits		2,365			(1,269	)
Income taxes		2,374			(1,045	)
Accrued expenses and other		2,235			1,273
Benefit obligations		3,580			4,044
Net cash provided by operating activities		37,856			6,692
Cash flows from investing activities:
Capital additions		(13,270	)		(8,445	)
Payment for acquisitions		-			(526,301	)
Other		367			208
Net cash used for investing activities		(12,903	)		(534,538	)
Cash flows from financing activities:
Cash dividends		(9,148	)		(8,869	)
Treasury share repurchases		(1,029	)		(918	)
Proceeds from bank borrowings		5,000			445,000
Payments to banks for borrowings		(13,750	)		-
Debt issuance fees		-			(15,165	)
Other		(534	)		(65	)
Net cash provided by (used for) financing activities		(19,461	)		419,983
Effect of exchange rate changes on cash		(102	)		(503	)
Net increase (decrease) in cash and cash equivalents		5,390			(108,366	)
Cash and cash equivalents:
Beginning of period		6,783			125,194
End of period	$	12,173		$	16,828

See notes to consolidated financial statements (unaudited).

THE GORMAN-RUPP COMPANY

CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)

	Six Months Ended June 30, 2023
(Dollars in thousands, except	Common Shares						Additional Paid-In			Retained			Accumulated Other Comprehensive
share and per share amounts)	Shares			Dollars			Capital			Earnings			(Loss) Income			Total
Balances December 31, 2022		26,094,865		$	5,097		$	3,912		$	346,659		$	(24,474	)	$	331,194
Net income											6,520						6,520
Other comprehensive loss														(1,144	)		(1,144	)
Stock based compensation, net		119,488			26			1			438						465
Treasury share repurchases		(36,105	)		(8	)		(889	)		(131	)					(1,028	)
Cash dividends - $0.175 per share											(4,567	)					(4,567	)
Balances March 31, 2023		26,178,248		$	5,115		$	3,024		$	348,919		$	(25,618	)	$	331,440
Net income											10,477						10,477
Other comprehensive income														2,882			2,882
Stock based compensation, net								1,141									1,141
Treasury share repurchases																	-
Cash dividends - $0.175 per share											(4,581	)					(4,581	)
Balances June 30, 2023		26,178,248		$	5,115		$	4,165		$	354,815		$	(22,736	)	$	341,359

	Six Months Ended June 30, 2022
(Dollars in thousands, except	Common Shares						Additional Paid-In			Retained			Accumulated Other Comprehensive
share and per share amounts)	Shares			Dollars			Capital			Earnings			(Loss) Income			Total
Balances December 31, 2021		26,103,661		$	5,099		$	1,838		$	353,369		$	(30,330	)	$	329,976
Net income											7,543						7,543
Other comprehensive income														387			387
Stock based compensation, net								682									682
Treasury share repurchases		(24,546	)		(5	)		(822	)		(91	)					(918	)
Cash dividends - $0.17 per share											(4,436	)					(4,436	)
Balances March 31, 2022		26,079,115		$	5,094		$	1,698		$	356,385		$	(29,943	)	$	333,234
Net income (loss)											(996	)					(996	)
Other comprehensive loss														(1,165	)		(1,165	)
Stock based compensation, net								730									730
Treasury share repurchases																	0
Cash dividends - $0.17 per share											(4,433	)					(4,433	)
Balances June 30, 2022		26,079,115		$	5,094		$	2,428		$	350,956		$	(31,108	)	$	327,370

See notes to consolidated financial statements (unaudited).

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

NOTE 1 - BASIS OF PRESENTATION OF FINANCIAL STATEMENTS

The accompanying unaudited Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The Consolidated Financial Statements include the accounts of The Gorman-Rupp Company (the “Company” or “Gorman-Rupp”) and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results. In the opinion of management of the Company, all adjustments considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2023 are not necessarily indicative of results that may be expected for the year ending December 31, 2023. For further information, refer to the Consolidated Financial Statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, from which related information herein has been derived.

NOTE 2 - ACQUISITIONS

On May 31, 2022, the Company acquired the assets of Fill-Rite and Sotera (“Fill-Rite”), a division of Tuthill Corporation, for cash consideration of $528.0 million. The transaction was funded with new debt consisting of $350.0 million from a senior secured term loan, $90.0 million from a subordinated unsecured loan, $5.0 million from the new revolving Credit Facility, and $83.0 million of cash on hand. Refer to “Note 10 – Financing Arrangements” for further details related to the financing completed as part of the transaction.

The Company accounted for the Fill-Rite transaction in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805 “Business Combinations”. The results of operations for Fill-Rite are included in the accompanying Consolidated Statements of Income from the acquisition date. Fill-Rite had $13.5 million in net sales and $0.2 million in operating income that was included in the Company’s consolidated financial statements for the three and six months ended June 30, 2022. Operating income included $1.4 million of inventory step up amortization and $0.2 million of acquired customer backlog amortization in addition to the $1.0 million in amortization on customer relationships and developed technology.

Under the acquisition method of accounting, the assets and liabilities have been recorded at their respective estimated fair values as of the date of completion of the acquisition and reported into the Company’s Consolidated Balance Sheets. The following table presents the fair value of assets acquired and liabilities assumed. No adjustments to the preliminary purchase price allocation were made during the second quarter of 2023 and the purchase price allocation is now final:

Account receivable	$	21,273
Inventory		12,214
Customer backlog (amortized over 1 year)		2,600
Other current assets		914
Property, plant, and equipment		24,505
Customer relationships (amortized over 20 years)		200,900
Technology (amortized over 20 years)		39,800
Tradenames (unamortized)		10,700
Goodwill		230,688
Total assets acquired	$	543,594
Current liabilities assumed		(15,601	)
Allocated purchase price	$	527,993

For tax purposes, the Fill-Rite acquisition was treated as an asset purchase. As such, the Company received a step-up in tax basis of the net Fill-Rite assets, equal to the purchase price, including goodwill which is deductible for tax purposes.

The transaction costs related to the acquisition approximated $6.9 million for the three and six months ended June 30, 2022. These costs were expensed as incurred and recorded within selling, general, and administrative expenses.

The following is supplemental pro-forma net sales, operating income, net income, and earnings per share had the Fill-Rite Acquisition occurred as of January 1, 2021 (in millions):

	Six Months Ended June 30, 2022
Net sales	$	286.3
Operating income	$	27.7
Net income	$	9.5
Earnings per share	$	0.36

The supplemental pro forma information presented above is being provided for information purposes only and may not necessarily reflect the future results of operations of the Company or what the results of operations would have been had the Company owned and operated Fill-Rite since January 1, 2021.

NOTE 3 – REVENUE

Disaggregation of Revenue

The following tables disaggregate total net sales by end market and geographic location:

	End market
	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Industrial	$	22,786	$	18,664	$	43,731	$	36,518
Fire		36,935		27,904		73,074		56,326
Agriculture		5,027		5,195		9,776		10,207
Construction		11,921		10,073		22,949		19,238
Municipal		19,549		16,950		36,973		31,257
Petroleum		3,719		2,631		7,739		6,173
OEM		9,480		9,300		18,490		18,031
Repair parts		18,722		14,809		35,912		29,943
Total net sales excluding Fill-Rite		128,139		105,526		248,644		207,693
Fill-Rite		42,885		13,541		82,846		13,541
Total net sales	$	171,024	$	119,067	$	331,490	$	221,234

	Geographic Location
	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
United States	$	128,289	$	85,375	$	248,039	$	157,766
Foreign countries		42,735		33,692		83,451		63,468
Total net sales	$	171,024	$	119,067	$	331,490	$	221,234

International sales represented approximately 25% and 28% of total net sales for the second quarter of 2023 and 2022, respectively, and were made to customers in many different countries around the world.

On June 30, 2023, the Company had $249.8 million of remaining performance obligations, also referred to as backlog. The Company expects to recognize as revenue substantially all of its remaining performance obligations within one year.

The Company’s contract assets and liabilities as of June 30, 2023 and December 31, 2022 were as follows:

	June 30, 2023		December 31, 2022
Contract assets	$	-	$	-
Contract liabilities	$	9,097	$	6,740

Revenue recognized for the six months ended June 30, 2023 and 2022 that was included in the contract liabilities balance at the beginning of the period was $3.7 million and $8.2 million, respectively.

NOTE 4 - INVENTORIES

LIFO inventories are stated at the lower of cost or market and all other inventories are stated at the lower of cost or net realizable value. Replacement cost approximates current cost and the excess over LIFO cost is approximately $92.6 million and $88.2 million at June 30, 2023 and December 31, 2022, respectively. Allowances for excess and obsolete inventory totaled $7.2 million at June 30, 2023 and December 31, 2022, respectively. An actual valuation of inventory under the LIFO method is made at the end of each year based on the inventory levels and costs at that time. Interim LIFO calculations are based on management’s estimate of expected year-end inventory levels and costs, and are subject to the final year-end LIFO inventory valuation.

Inventories are comprised of the following:

	June 30, 2023		December 31, 2022
Inventories, net:
Raw materials and in-process	$	40,752	$	40,448
Finished parts		61,536		57,224
Finished products		13,528		13,461
Total net inventories	$	115,816	$	111,133

NOTE 5 – PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment, net consist of the following:

	June 30, 2023			December 31, 2022
Land	$	6,210		$	6,215
Buildings		120,149			119,197
Machinery and equipment		224,510			212,581
	$	350,869		$	337,993
Less accumulated depreciation		(214,822	)		(209,353	)
Property, plant and equipment, net	$	136,047		$	128,640

NOTE 6 - PRODUCT WARRANTIES

A liability is established for estimated future warranty and service claims based on historical claims experience and specific product failures. The Company expenses warranty costs directly to Cost of products sold. Changes in the Company’s product warranties liability are:

	June 30,
	2023			2022
Balance of beginning of year	$	1,973		$	1,637
Provision		2,130			593
Acquired		-			645
Claims		(1,741	)		(665	)
Balance at end of period	$	2,362		$	2,210

NOTE 7 - PENSION AND OTHER POSTRETIREMENT BENEFITS

The Company sponsors a defined benefit pension plan (“GR Plan”) covering certain domestic employees. Benefits are based on each covered employee’s years of service and compensation. The GR Plan is funded in conformity with the funding requirements of applicable U.S. regulations. The GR Plan was closed to new participants effective January 1, 2008. Employees hired after this date, in eligible locations, participate in an enhanced 401(k) plan instead of the defined benefit pension plan. Employees hired prior to this date continue to accrue benefits.

The Company established a defined benefit pension plan for certain Fill-Rite employees (“Fill-Rite Plan”) upon the acquisition as of June 1, 2022. The activity is included in the tables within this footnote.

Additionally, the Company sponsors defined contribution pension plans made available to all domestic and Canadian employees. The Company funds the cost of these benefits as incurred.

The Company also sponsors a non-contributory defined benefit postretirement health care plan that provides health benefits to certain domestic and Canadian retirees and eligible spouses and dependent children. The Company funds the cost of these benefits as incurred.

The following tables present the components of net periodic benefit costs:

	Pension Benefits						Postretirement Benefits
	Three Months Ended June 30,						Three Months Ended June 30,
	2023			2022			2023			2022
Service cost	$	530		$	482		$	209		$	287
Interest cost		635			711			299			190
Expected return on plan assets		(657	)		(692	)		-			-
Amortization of prior service cost		-			-			(249	)		(283	)
Recognized actuarial loss		301			481			(9	)		92
Settlement loss		-			1,597			-			-
Net periodic benefit cost (a)	$	809		$	2,579		$	250		$	286

	Pension Benefits						Postretirement Benefits
	Six Months Ended June 30,						Six Months Ended June 30,
	2023			2022			2023			2022
Service cost	$	1,060		$	1,146		$	417		$	573
Interest cost		1,270			1,165			598			380
Expected return on plan assets		(1,314	)		(1,504	)		-			-
Amortization of prior service cost		-			-			(497	)		(565	)
Recognized actuarial loss		601			935			(18	)		184
Settlement loss		-			1,597			-			-
Net periodic benefit cost (a)	$	1,617		$	3,339		$	500		$	572

(a)	The components of net periodic cost other than the service cost component are included in Other income (expense), net in the Consolidated Statements of Income.

During the three and six months ended June 30, 2022, the Company recorded a settlement loss relating to retirees that received lump-sum distributions from the Company’s defined benefit pension plan totaling $1.6 million. There were no settlement losses recorded for the three or six month periods ended June 30, 2023. These changes were the result of lump-sum payments to retirees exceeding the Plan’s actuarial service and interest cost.

NOTE 8 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The components of Accumulated other comprehensive income (loss) as reported in the Consolidated Balance Sheets are:

	Currency Translation Adjustments			Deferred Gain (Loss) on Cash Flow Hedging			Pension and OPEB Adjustments			Accumulated Other Comprehensive (Loss) Income
Balance at December 31, 2022	$	(10,619	)	$	(617	)	$	(13,238	)	$	(24,474	)
Reclassification adjustments		-			(588	)		583			(5	)
Current period benefit (charge)		278			2,023			(72	)		2,229
Income tax benefit (charge)		-			(341	)		(145	)		(486	)
Balance at June 30, 2023	$	(10,341	)	$	477		$	(12,872	)	$	(22,736	)

	Currency Translation Adjustments			Deferred Gain (Loss) on Cash Flow Hedging		Pension and OPEB Adjustments			Accumulated Other Comprehensive (Loss) Income
Balance at December 31, 2021	$	(7,851	)	$	-	$	(22,479	)	$	(30,330	)
Reclassification adjustments		-			-		2,716			2,716
Current period benefit (charge)		(2,864	)		-		-			(2,864	)
Income tax benefit (charge)		-			-		(630	)		(630	)
Balance at June 30, 2022	$	(10,715	)	$	-	$	(20,393	)	$	(31,108	)

NOTE 9 – COMMON SHARE REPURCHASES

The Company has a share repurchase program with the authorization to purchase up to $50.0 million of the Company’s common shares. As of June 30, 2023, the Company had $48.1 million available for repurchase under the share repurchase program. During the six-month period ending June 30, 2023, the Company repurchased 36,105 shares at an average cost per share of $28.51 for a total of $1.0 million in the surrender of common shares to cover taxes in connection with the vesting of stock awards, which were not part of the share repurchase program. During the six-month period ending June 30, 2022, the Company repurchased 24,546 shares at an average cost per share of $37.39 for a total of $0.9 million. No shares were repurchased during the three month periods ending June 30, 2023 and 2022.

NOTE 10 – FINANCING ARRANGEMENTS

Debt consisted of:
Senior Secured Credit Agreement	June 30, 2023			December 31, 2022
Senior term loan facility	$	332,500		$	341,250
Credit facility		17,000			17,000
Subordinated Credit Agreement
Subordinated credit facility		90,000			90,000
Total debt		439,500			448,250
Unamortized discount and debt issuance fees		(10,595	)		(11,423	)
Total debt, net		428,905			436,827
Less: current portion of long-term debt		(17,500	)		(17,500	)
Total long-term debt, net	$	411,405		$	419,327

The carrying value of long term debt, including the current portion, approximates fair value as the variable interest rates approximate rates available to other market participants with comparable credit risk.

Senior Secured Credit Agreement

On May 31, 2022, the Company entered into a Senior Secured Credit Agreement with several lenders, which provides a term loan of $350.0 million (“Senior Term Loan Facility”) and a revolving credit facility up to $100.0 million (“Credit Facility”). The Credit Facility has a letter of credit sublimit of up to $15.0 million, as a sublimit of the Credit Facility, and a swing line subfacility of up to $20.0 million, as a sublimit of the Credit Facility. The Company borrowed $5.0 million under the Credit Facility, which, along with the Senior Term Loan Facility, and cash-on-hand and the proceeds of the Subordinated Credit Facility described below, was used to purchase the assets of Fill-Rite as described in “Note 2 – Acquisitions”. The Company has agreed to secure all of its obligations under the Senior Secured Credit Agreement by granting a first priority lien on substantially all of its personal property, and each of Patterson Pump Company, AMT Pump Company, National Pump Company and Fill-Rite Company (collectively, the “Guarantors”) has agreed to guarantee the obligations of the Company under the Senior Secured Credit Agreement and to secure the obligations thereunder by granting a first priority lien in substantially all of such Guarantor’s personal property.

The Senior Secured Credit Agreement has a maturity date of May 31, 2027, with the Senior Term Loan Facility requiring quarterly installment payments commencing on September 30, 2022 and continuing on the last day of each consecutive December, March, June and September thereafter.

At the option of the Company, borrowings under the Senior Term Loan Facility and under the Credit Facility bear interest at either a base rate or at an Adjusted Term SOFR Rate, plus the applicable margin, which ranges from 0.75% to 1.75% for base rate loans and 1.75% to 2.75% for Adjusted Term SOFR Rate loans. The applicable margin is based on the Company’s senior leverage ratio. As of June 30, 2023, the applicable interest rate under the Senior Secured Credit Agreement was Adjusted Term SOFR plus 2.5%.

The Senior Secured Credit Agreement includes covenants requiring the Company to maintain certain maximum leverage ratios and a minimum fixed charge coverage ratio. On June 30, 2023, the Senior Secured Credit Agreement was amended to provide the Company with more flexibility by adjusting the minimum fixed charge coverage ratio to not less than 1.00 to 1.00 for each four consecutive fiscal quarter periods ending June 30, 2023 through and including June 30, 2024 and not less than 1.10 to 1.00 for each four consecutive fiscal quarter periods ending September 30, 2024 through and including December 31, 2024. We were in compliance with all of our debt covenants as of June 30, 2023, including those covenants as they were in effect prior to the amendment of the Senior Secured Credit Agreement.

Subordinated Credit Agreement

On May 31, 2022, the Company entered into an unsecured subordinated credit agreement (“Subordinated Credit Agreement”) which provides for a term loan of $90.0 million (the “Subordinated Credit Facility”). Each of the Guarantors has agreed to guarantee the obligations of the Company under the Subordinated Credit Agreement. The proceeds from the Subordinated Credit Facility, along with cash-on-hand and the proceeds of the Senior Term Loan Facility described above, were used to purchase the assets of Fill-Rite as described in “Note 2 – Acquisitions”.

The Subordinated Credit Agreement has a maturity date of December 1, 2027. If the Subordinated Credit Facility is prepaid prior to the second anniversary, such prepayment must be accompanied by a make-whole premium. If the Subordinated Credit Facility is prepaid after the second anniversary but prior to the third anniversary, such prepayment requires a prepayment fee of 2%, and if the Subordinated Credit Facility is prepaid after the third anniversary but prior to the fourth anniversary, such prepayment requires a prepayment fee of 1%.

At the option of the Company, borrowings under the Subordinated Credit Facility bear interest at either a base rate plus 8.0%, or at an Adjusted Term SOFR Rate plus 9.0%. As of June 30, 2023 borrowings under the Subordinated Credit Facility bear interest at an Adjusted Term SOFR Rate plus 9.1%.

The Subordinated Credit Agreement includes covenants subject to maximum leverage ratios. We were in compliance with all of our debt covenants as of June 30, 2023.

Interest Rate Derivatives

The Company entered into interest rate swaps that hedge interest payments on its SOFR borrowing during the fourth quarter of 2022. All swaps have been designated as cash flow hedges. The following table summarizes the notional amounts, related rates and remaining terms of interest swap agreements as of June 30, 2023 and December 31, 2022:

Notional Amount

Average Fixed Rate

June 30,

2023

December 31,

2022

June 30,

2023

December 31,

2022

Term

Interest rate swaps

166,250

170,600

4.1

Extending to May 2027

The fair value of the Company’s interest rate swaps was a receivable of $0.6 million as of June 30, 2023 and a payable of $0.8 million as of December 31, 2022. The fair value was based on inputs other than quoted prices in active markets for identical assets that are observable either directly or indirectly and therefore considered level 2. The mark-to-market effect of interest rate swap agreements that are considered effective as hedges has been included in Accumulated Other Comprehensive Loss. The interest rate swap agreements held by the Company on June 30, 2023 are expected to continue to be effective hedges.

The following table summarizes the fair value of derivative instruments as recorded in the Consolidated Balance Sheets:

	June 30, 2023			December 31, 2022
Current Assets:
Prepaid and Other	$	1,879		$	1,203
Long-term liabilities:
Other long-term liabilities		(1,253	)		(2,012	)
Total derivatives	$	626		$	(809	)

The following table summarizes total gains (losses) recognized on derivatives:

Derivatives in Cash Flow Hedging Relationships	Location of (Loss) Gain Recognized in Income on Derivatives	Amount of (Loss) Gain Recognized in Income on Derivatives
		Three Months Ended June 30,				Six Months Ended June 30,
		2023		2022		2023		2022
Interest rate swaps	Interest Expense	$	397	$	-	$	588	$	-

The effects of derivative instruments on the Company’s Consolidated Statements of Results of Operations and Comprehensive Income (Loss) for OCI are as follows:

Derivatives in Cash Flow Hedging Relationships	Amount of (Loss) Gain Recognized in AOCI on Derivatives				Location of (Loss) Gain Reclassed from AOCI into Income (Effective Portion)	Amount of (Loss) Gain Reclassed from AOCI into Income (Effective Portion)
	Three Months Ended June 30,					Three Months Ended June 30,
	2023		2022			2023			2022
Interest rate swaps	$	3,842	$	-	Interest expense	$	(397	)	$	-

Derivatives in Cash Flow Hedging Relationships	Amount of (Loss) Gain Recognized in AOCI on Derivatives				Location of (Loss) Gain Reclassed from AOCI into Income (Effective Portion)	Amount of (Loss) Gain Reclassed from AOCI into Income (Effective Portion)
	Six Months Ended June 30,					Six Months Ended June 30,
	2023		2022			2023			2022
Interest rate swaps	$	2,023	$	-	Interest expense	$	(588	)	$	-

NOTE 11 – LEASES

On June 1, 2023, the Company commenced a lease for a new manufacturing facility in Lenexa Kansas with an initial lease term through August 31, 2043. The Company will vacate its current leased Lenexa manufacturing facility on August 31, 2023, with no additional lease liability after that date. The new lease is considered an operating lease and is subject to annual rent escalations based on the greater of a set minimum percentage or the Consumer Price Index. As result of this lease, the Company recorded a right-of-use (ROU) asset which is included in Other Assets, and a long-term lease liability, which is included in Other Long-Term Liabilities, each of approximately $17.5 million as of June 30, 2023. The impact on the Consolidated Statements of Income for the three and six month periods ended June 30, 2023 was not material.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Dollars in thousands, except for per share amounts)

The following discussion and analysis of the Company’s financial condition and Results of Operations should be read in conjunction with the Consolidated Financial Statements, and notes thereto, and the other financial data included elsewhere in this Quarterly Report on Form 10-Q. The following discussion should also be read in conjunction with the Company’s audited Consolidated Financial Statements and accompanying notes, and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in its Annual Report on Form 10-K for the year ended December 31, 2022.

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 was 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 and does not expect to incur material acquisition costs in connection with the transaction going forward. The results of operations for Fill-Rite are included in the Company’s Consolidated Statements of Income from the acquisition date.

The Company’s backlog of orders was $249.8 million at June 30, 2023 compared to $264.7 million at June 30, 2022 and $267.4 million at December 31, 2022. Incoming orders for the first six months of 2023 were $321.0 million, or an increase of 12.0% compared to the same period in 2022, and a decrease of 13.8% excluding Fill-Rite.

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

Outlook

The Company’s backlog is down from the record level at the end of the first quarter of 2023 but remains elevated, which positions us well for the remainder of the year. We believe that our inventory levels have peaked and that we will see a reduction in the second-half, which will further contribute to our improvements in cash flow. We remain focused on delivering long term sustained growth and continuing to improve our debt leverage.

Three Months Ended June 30, 2023 vs. Three Months Ended June 30, 2022

Net Sales

The following table presents the Company’s disaggregated net sales by its end markets for the three months ended June 30, 2023 and June 30, 2022:

	Three Months Ended June 30,
	2023		2022		$ Change			% Change
Industrial	$	22,786	$	18,664	$	4,122			22.1	%
Fire		36,935		27,904		9,031			32.4	%
Agriculture		5,027		5,195		(168	)		(3.2	)%
Construction		11,921		10,073		1,848			18.3	%
Municipal		19,549		16,950		2,599			15.3	%
Petroleum		3,719		2,631		1,088			41.4	%
OEM		9,480		9,300		180			1.9	%
Repair parts		18,722		14,809		3,913			26.4	%
Total net sales excluding Fill-Rite		128,139		105,526		22,613			21.4	%
Fill-Rite		42,885		13,541		29,344			216.7	%
Total net sales	$	171,024	$	119,067	$	51,957			43.6	%

Net sales for the second quarter of 2023 were $171.0 million compared to net sales of $119.1 million for the second quarter of 2022, an increase of 43.6% or $52.0 million. Domestic sales increased 50.3% or $42.9 million and international sales increased 26.8% or $9.0 million compared to the same period in 2022.

Fill-Rite sales were $42.9 million for the second quarter of 2023 compared to $13.5 million from the acquisition date of May 31, 2022 to June 30, 2022. In addition to the increase at Fill-Rite, sales increased $22.6 million, or 21.4%, due to an increase in volume as well as the impact of two pricing increases taken in 2022 and an annual price increase in January 2023. The Company’s two price increases in 2022, as well as the price increase in 2023 averaged between 4.0% - 5.0%. Sales increased $9.0 million in the fire suppression market primarily from increased domestic commercial construction, $4.1 million in the industrial market and $3.9 million in the repair market due to strengthening in the broader industrial economy, $2.6 million in the municipal market due to domestic flood control and wastewater projects related to increased infrastructure investment, $1.9 million in the construction market due to strong overall conditions including infrastructure related projects, $1.1 million in the petroleum market due to increased demand for larger petroleum transfer pumps, and $0.2 million in the OEM market. Partially offsetting these increases was a sales decrease of $0.2 million in the agriculture market primarily driven by weather conditions, where increased snowfall runoff and rain have slowed demand.

Cost of Products Sold and Gross Profit

	Three Months Ended June 30,
	2023			2022			$ Change		% Change
Cost of products sold	$	119,366		$	90,828		$	28,538		31.4	%
% of Net sales		69.8	%		76.3	%
Gross Margin		30.2	%		23.7	%

Gross profit was $51.7 million for the second quarter of 2023, resulting in gross margin of 30.2%, compared to gross profit of $28.2 million and gross margin of 23.7% for the same period in 2022. The 650 basis point increase in gross margin included a 200 basis point improvement on labor and overhead leverage due to increased sales volume and sales mix which includes a full quarter of Fill-Rite. The increase in gross margin also included a 450 basis point improvement in cost of material, which consisted of a reduction in LIFO expense of 210 basis points, a 120 basis point improvement from the realization of selling price increases, and a favorable impact of 120 basis points related to the Fill-Rite inventory step-up that was recorded during the second quarter of 2022 that did not recur in 2023.

Selling, General and Administrative (SG&A) Expenses

	Three Months Ended June 30,
	2023			2022			$ Change		% Change
Selling, general and administrative expenses	$	24,193		$	24,114		$	79		0.3	%
% of Net sales		14.1	%		20.3	%

Selling, general and administrative (“SG&A”) expenses were $24.2 million and 14.1% of net sales for the second quarter of 2023 compared to $24.1 million and 20.3% of net sales for the same period in 2022. SG&A expenses for the second quarter of 2022 included $6.9 million of one-time acquisition costs. Excluding acquisition costs, SG&A expenses were $17.2 million and 14.5 % of net sales for the second quarter of 2022. The increase in SG&A expenses, excluding acquisition costs, was due to the inclusion of a full quarter of Fill-Rite as compared to one month in the same period in 2022, as well as increased expenses to support sales growth. The improvement in SG&A as a percent of sales was primarily due to favorable leverage from increased sales.

Amortization expense

	Three Months Ended June 30,
	2023			2022			$ Change		% Change
Amortization expense	$	3,182		$	1,218		$	1,964		161.2	%
% of Net sales		1.9	%		1.0	%

Amortization expense was $3.2 million for the second quarter of 2023 compared to $1.2 million for the same period in 2022. The increase in amortization expense was due to a full quarter of amortization attributable to the Fill-Rite acquisition compared to one month for the same period in 2022.

Operating Income

	Three Months Ended June 30,
	2023			2022			$ Change		% Change
Operating Income	$	24,283		$	2,907		$	21,376		735.3	%
% of Net sales		14.2	%		2.4	%

Operating income was $24.3 million for the second quarter of 2023, resulting in an operating margin of 14.2%, compared to operating income of $2.9 million and operating margin of 2.4% for the same period in 2022. Operating income for the second quarter of 2022 included $6.9 million of one-time acquisition costs and $1.4 million of inventory step-up amortization. Excluding acquisition costs and inventory step-up totaling together $8.3 million, operating income was $11.2 million for the second quarter 2022 resulting in an operating margin of 9.4% of net sales. Excluding acquisition costs and inventory step-up in the second quarter of 2022 totaling $8.3 million, operating margin in the second quarter of 2023 increased 480 basis points compared to the same period in 2022 due to improved leverage on labor, overhead, and SG&A expenses due to increased sales volumes and improved cost of material partially offset by increased amortization expense.

Interest Expense

	Three Months Ended June 30,
	2023			2022			$ Change			% Change
Interest Expense	$	(10,485	)	$	(2,322	)	$	(8,163	)		351.6	%
% of Net sales		(6.1	)%		(2.0	)%

Interest expense was $10.5 million for the second quarter of 2023 compared to $2.3 million for the same period in 2022. The increase in interest expense was due to the inclusion of a full quarter of interest expense and increased interest rates on the debt financing attributable to the Fill-Rite acquisition.

Net Income (loss)

	Three Months Ended June 30,
	2023			2022			$ Change		% Change
Income (loss) before income taxes	$	13,262		$	(1,261	)	$	14,523		1151.7	%
% of Net sales		7.8	%		(1.1	%)
Income taxes	$	2,785		$	(265	)	$	3,050		1150.9	%
Effective tax rate		21.0	%		21.0	%
Net income (loss)	$	10,477		$	(996	)	$	11,473		1151.9	%
% of Net sales		6.1	%		(0.8	%)
Earnings per share	$	0.40		$	(0.04	)	$	0.44		1100.0	%

The Company’s effective tax rate was 21.0% for both the second quarter of 2023 and 2022.

Net income was $10.5 million, or $0.40 per share, for the second quarter of 2023 compared to net loss of ($1.0) million, or ($0.04) per share, in the second quarter of 2022. Adjusted earnings per share for the second quarter of 2023 were $0.41 per share compared to $0.27 per share for the second quarter of 2022. Adjusted earnings per share for the second quarter of 2023 included an unfavorable LIFO impact of $0.07 per share compared to an unfavorable LIFO impact of $0.13 per share in the second quarter of 2022. Adjusted earnings per share is a non-GAAP financial measure; see “Non-GAAP Financial Information” below for a definition of the measure and the reconciliation to its comparable GAAP financial measure.

Six Months Ended June 30, 2023 vs. Six Months Ended June 30, 2022

Net Sales

The following table presents the Company’s disaggregated net sales by its end markets for the six months ended June 30, 2023 and June 30, 2022:

	Six Months Ended June 30,
	2023		2022		$ Change			% Change
Industrial	$	43,731	$	36,518	$	7,213			19.8	%
Fire		73,074		56,326		16,748			29.7	%
Agriculture		9,776		10,207		(431	)		(4.2	)%
Construction		22,949		19,238		3,711			19.3	%
Municipal		36,973		31,257		5,716			18.3	%
Petroleum		7,739		6,173		1,566			25.4	%
OEM		18,490		18,031		459			2.5	%
Repair parts		35,912		29,943		5,969			19.9	%
Total net sales excluding Fill-Rite		248,644		207,693		40,951			19.7	%
Fill-Rite		82,846		13,541		69,305			511.8	%
Total net sales	$	331,490	$	221,234	$	110,256			49.8	%

Net sales for the first six months of 2023 were $331.5 million compared to net sales of $221.2 million for the first six months of 2022, an increase of 49.8% or $110.3 million. Domestic sales increased 57.2% or $90.3 million and international sales increased 31.5% or $20.0 million compared to the same period in 2022.

Fill-Rite sales were $82.8 million for the first six months of 2023 compared to $13.5 million from the acquisition date of May 31, 2022 to June 30, 2022. In addition to the increase from Fill-Rite, sales increased $41.0 million, or 19.7%, due to an increase in volume as well as the impact of two pricing increases taken in 2022 and an annual price increase in January 2023. The Company’s two price increases in 2022, as well as the price increase in 2023 averaged between 4.0% - 5.0%. Sales increased $16.7 million in the fire market primarily from increased domestic commercial construction, $7.2 million in the industrial market and $6.0 million in the repair market due to strengthening in the broader industrial economy, $5.7 million in the municipal market due to domestic flood control and wastewater projects related to increased infrastructure investment, $3.7 million in the construction market due to strong overall conditions including infrastructure related projects, $1.6 million in the petroleum market due to increased demand for larger petroleum transfer pumps, and $0.5 million in the OEM market. Partially offsetting these increases was a decrease of $0.4 million in the agriculture market primarily driven by weather conditions, where increased snowfall runoff and rain have slowed demand.

Cost of Products Sold and Gross Profit

	Six Months Ended June 30,
	2023			2022			$ Change		% Change
Cost of products sold	$	234,309		$	167,498		$	66,811		39.9	%
% of Net sales		70.7	%		75.7	%
Gross Margin		29.3	%		24.3	%

Gross profit was $97.2 million for the first six months of 2023, resulting in gross margin of 29.3%, compared to gross profit of $53.7 million and gross margin of 24.3% for the same period in 2022. The 500 basis point increase in gross margin included a 225 basis point improvement on labor and overhead leverage due to increased sales volume and sales mix which includes six months of Fill-Rite for 2023 compared to one month for the same period in 2022. The increase in gross margin also included a 275 basis point improvement in cost of material, which consisted of a favorable LIFO impact of 140 basis points, a favorable impact of 60 basis points related to the Fill-Rite inventory step-up that was recorded in 2022 that did not recur in 2023 and a 75 basis point improvement in cost of material from the realization of selling price increases.

Selling, General and Administrative (SG&A) Expenses

	Six Months Ended June 30,
	2023			2022			$ Change		% Change
Selling, general and administrative expenses	$	47,430		$	39,936		$	7,494		18.8	%
% of Net sales		14.3	%		18.1	%

Selling, general and administrative (“SG&A”) expenses were $47.4 million and 14.3% of net sales for the first six months of 2023 compared to $39.9 million and 18.1% of net sales for the same period in 2022. SG&A expenses for the first six months of 2022 included $6.9 million of one-time acquisition costs. Excluding acquisition costs of $6.9 million, SG&A expenses were $33.0 million, and 14.9% of net sales for the first six months of 2022. The increase in SG&A expenses, excluding acquisition costs, was due to the inclusion of Fill-Rite for the full six month period in 2022 as compared to one month in the same period in 2022, as well as increased expenses to support sales growth. The improvement in SG&A as a percent of sales was primarily due to favorable leverage from increased sales.

Amortization expense

	Six Months Ended June 30,
	2023			2022			$ Change		% Change
Amortization expense	$	6,373		$	1,435		$	4,938		344.1	%
% of Net sales		1.9	%		0.6	%

Amortization expense was $6.4 million for the first six months of 2023 compared to $1.4 million for the same period in 2022. The increase in amortization expense was due to the inclusion of six months of amortization attributable to the Fill-Rite acquisition compared to one month for the same period in 2022.

Operating Income

	Six Months Ended June 30,
	2023			2022			$ Change		% Change
Operating Income	$	43,378		$	12,365		$	31,013		250.8	%
% of Net sales		13.1	%		5.6	%

Operating income was $43.4 million for the first six months of 2023, resulting in an operating margin of 13.1%, compared to operating income of $12.4 million and operating margin of 5.6% for the same period in 2022. Operating income for the first six months of 2022 included $6.9 million of one-time acquisition costs and $1.4 million of inventory step up amortization. Excluding acquisition costs and inventory step-up totaling together $8.3 million, operating income was $20.7 million for the first six months of 2022 resulting in an operating margin of 9.4% of net sales. Excluding acquisition costs and inventory step-up in 2022 totaling $8.3 million operating margin in the first six months of 2023 increased 370 basis points compared to the same period in 2022 due to improved leverage on labor, overhead, and SG&A expenses due to increased sales volumes and improved cost of material partially offset by increased amortization expense.

Interest Expense

	Six Months Ended June 30,
	2023			2022			$ Change			% Change
Interest Expense	$	(20,672	)	$	(2,322	)	$	(18,350	)		790.3	%
% of Net sales		(6.2	)%		(1.0	)%

Interest expense was $20.7 million for the first six months of 2023 compared to $2.3 million for the same period in 2022. The increase in interest expense was primarily due to the inclusion of six months of interest expense in 2023 compared to one month for the first six months of 2022 on the debt financing attributable to the Fill-Rite acquisition, as well as increased interest rates in 2023 as compared to 2022.

Net Income (loss)

	Six Months Ended June 30,
	2023			2022			$ Change		% Change
Income (loss) before income taxes	$	21,737		$	8,287		$	13,450		162.3	%
% of Net sales		6.6	%		3.7	%
Income taxes	$	4,740		$	1,740		$	3,000		172.4	%
Effective tax rate		21.8	%		21.0	%
Net income (loss)	$	16,997		$	6,547		$	10,450		159.6	%
% of Net sales		5.1	%		3.0	%
Earnings per share	$	0.65		$	0.25		$	0.40		160.0	%

The Company’s effective tax rate was 21.8% for the first six months of 2023 compared to 21.0% for the first six months of 2022.

Net income was $17.0 million, or $0.65 per share, for the first six months of 2023 compared to net income of $6.5 million, or $0.25 per share for the first six months of 2022. Adjusted earnings per share for the first six months of 2023 were $0.68 per share compared to $0.56 per share for the first six months of 2022. Adjusted earnings per share for the first six months of 2023 included an unfavorable LIFO impact of $0.13 per share compared to an unfavorable LIFO impact of $0.18 per share in the first six months of 2022. Adjusted earnings per share is a non-GAAP financial measure; see “Non-GAAP Financial Information” below for a definition of the measure and the reconciliation to its comparable GAAP financial measure.

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.

	Three Months Ended June 30,					Six Months Ended June 30,
	2023		2022			2023		2022
Adjusted earnings:
Reported net income (loss) – GAAP basis	$	10,477	$	(996	)	$	16,997	$	6,547
Plus pension settlement charge		-		1,261			-		1,261
Plus one-time acquisition costs		-		5,446			-		5,446
Plus amortization of step up in value of acquired inventories		-		1,111			-		1,111
Plus amortization of acquired customer backlog		344		171			857		171
Non-GAAP adjusted earnings	$	10,821	$	6,993		$	17,854	$	14,536

	Three Months Ended June 30,					Six Months Ended June 30,
	2023		2022			2023		2022
Adjusted earnings per share:
Reported earnings (loss) per share – GAAP basis	$	0.40	$	(0.04	)	$	0.65	$	0.25
Plus pension settlement charge		-		0.05			-		0.05
Plus one-time acquisition costs		-		0.21			-		0.21
Plus amortization of step up in value of acquired inventories		-		0.04			-		0.04
Plus amortization of acquired customer backlog		0.01		0.01			0.03		0.01
Non-GAAP adjusted earnings per share	$	0.41	$	0.27		$	0.68	$	0.56

Adjusted earnings (loss) before interest, taxes, depreciation and amortization:
Reported net income (loss) –GAAP basis	$	10,477	$	(996	)	$	16,997	$	6,547
Plus interest expense		10,485		2,322			20,672		2,322
Plus provision (benefit) for income taxes		2,785		(265	)		4,740		1,740
Plus depreciation and amortization expense		7,114		4,268			14,158		7,201
Non-GAAP earnings before interest, taxes, depreciation and amortization		30,861		5,329			56,567		17,810
Plus pension settlement charge		-		1,597			-		1,597
Plus one-time acquisition costs		-		6,894			-		6,894
Plus amortization of step up in value of acquired inventories		-		1,406			-		1,406
Plus amortization of acquired customer backlog		434		217			1,085		217
Plus non-cash LIFO expense		2,409		4,200			4,440		6,004
Non-GAAP adjusted earnings before interest, taxes, depreciation and amortization	$	33,704	$	19,643		$	62,092	$	33,928

Liquidity and Capital Resources

Our primary sources of liquidity are cash generated from operations and borrowings under our Credit Facility. Cash and cash equivalents totaled $12.2 million at June 30, 2023. The Company had an additional $80.9 million available under the revolving credit facility after deducting $17.0 million drawn and $2.1 million in outstanding letters of credit primarily related to customer orders. 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.

As of June 30, 2023, the Company had $439.5 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 June 30, 2023 and December 31, 2022.

Capital expenditures for the first six months of 2023 were $13.3 million and consisted primarily of machinery and equipment and building improvements. Capital expenditures for the full-year 2023 are presently planned to be in the range of $18-$20 million primarily for building improvements and machinery and equipment purchases, and are expected to be financed through internally-generated funds.

On July 27, 2023, the Board of Directors authorized the payment of a quarterly dividend of $0.175 per share on the common stock of the Company, payable September 8, 2023, to shareholders of record as of August 15, 2023. This will mark the 294th consecutive quarterly dividend paid by The Gorman-Rupp Company. The Company currently expects to continue its exceptional history of paying regular quarterly dividends and increased annual dividends. However, any future dividends will be reviewed individually and declared by our Board of Directors at its discretion, dependent on our assessment of the Company’s financial condition and business outlook at the applicable time.

The Board of Directors has authorized a share repurchase program of up to $50.0 million of the Company’s common shares. The actual number of shares repurchased will depend on prevailing market conditions, alternative uses of capital and other factors, and will be determined at management’s discretion. The Company is not obligated to make any purchases under the program, and the program may be suspended or discontinued at any time. As of June 30, 2023, the Company had $48.1 million available for repurchase under the share repurchase program.

Financial Cash Flow

	Six Months Ended June 30,
	2023			2022
Beginning of period cash and cash equivalents	$	6,783		$	125,194
Net cash provided by operating activities		37,856			6,692
Net cash used for investing activities		(12,903	)		(534,538	)
Net cash provided by (used for) financing activities		(19,461	)		419,983
Effect of exchange rate changes on cash		(102	)		(503	)
Net increase (decrease) in cash and cash equivalents	$	5,390		$	(108,366	)
End of period cash and cash equivalents	$	12,173		$	16,828

The increase in cash provided by operating activities in the first six months of 2023 compared to the same period last year was primarily due to increased earnings before depreciation, amortization, and LIFO expense, and improved cash flow from better working capital management.

During the first six months of 2023, investing activities of $12.9 million consisted of $13.3 million for capital expenditures primarily for machinery and equipment. During the first six months of 2022, investing activities of $534.5 million consisted of $526.3 million for the acquisition of Fill-Rite and $8.4 million for capital expenditures primarily for machinery and equipment.

Net cash used for financing activities for the first six months of 2023 primarily consisted of net payments on bank borrowings of $8.8 million, dividend payments of $9.1 million, and share repurchases of $1.0 million. Net cash received for financing activities for the first six months of 2022 consisted of proceeds from the new Senior Term Loan Facility of $350.0 million, $90.0 million in unsecured subordinated debt, and $5.0 million from the new revolving credit facility. Partially offsetting these proceeds were debt issuance fees paid of $15.2 million, dividend payments of $8.9 million and share repurchases of $0.9 million during the first six months of 2022.

Critical Accounting Policies

Our critical accounting policies are described in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and in the notes to our Consolidated Financial Statements for the year ended December 31, 2022 contained in our Annual Report on Form 10-K for the year ended December 31, 2022. Any new accounting policies or updates to existing accounting policies as a result of new accounting pronouncements have been discussed in the notes to our Consolidated Financial Statements in this Quarterly Report on Form 10-Q. The application of our critical accounting policies may require management to make judgments and estimates about the amounts reflected in the Consolidated Financial Statements. Management uses historical experience and all available information to make these estimates and judgments, and different amounts could be reported using different assumptions and estimates.

Cautionary Note Regarding Forward-Looking Statements

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

Such uncertainties include, but are not limited to, our estimates of future earnings and cash flows, general economic conditions and supply chain conditions and any related impact on costs and availability of materials, integration of the Fill-Rite business in a timely and cost effective manner, retention of supplier and customer relationships and key employees, the ability to achieve synergies and cost savings in the amounts and within the time frames currently anticipated and the ability to service and repay indebtedness incurred in connection with the transaction. Other factors include, but are not limited to: company specific risk factors including (1) loss of key personnel; (2) intellectual property security; (3) acquisition performance and integration; (4) 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) cyber security 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 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Interest Rate Risk

The results of operations are exposed to changes in interest rates primarily with respect to borrowings under the Company’s Senior Term Loan Facility, Credit Facility, and Subordinated Credit Facility. Borrowings under the Senior Term Loan Facility and Credit Facility may be made either at (i) a base rate plus the applicable margin, which ranges from 0.75% to 1.75%, or at (ii) an Adjusted Term SOFR Rate, plus the applicable margin, which ranges from 1.75% to 2.75%. Borrowings under the Subordinated Credit Facility bear interest at (i) either a base rate plus 8.0%, or at (ii) an Adjusted Term SOFR Rate plus 9.1%. At June 30, 2023, the Company had $332.5 million in borrowings under the Senior Term Loan Facility, $17.0 million in borrowings under the Credit Facility, and $90.0 million in borrowings under the Subordinated Credit Facility. As of June 30, 2023, the applicable interest rates under the Senior Secured Credit Agreement and the Subordinated Credit Facility were Adjusted Term SOFR plus 2.5% and Adjusted Term SOFR plus 9.1%, respectively.

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 designated as a cash flow hedge, and as a result, the mark-to-market gains or losses will be deferred and included as a component of accumulated other comprehensive income (loss) and reclassified to interest expense in the period during which the hedged transactions affect earnings.

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

Foreign Currency Risk

The Company’s foreign currency exchange rate risk is limited primarily to the Euro, Canadian Dollar, South African Rand and British Pound. The Company manages its foreign exchange risk principally through invoicing customers in the same currency as is used in the market of the source of products. The foreign currency transaction gains (losses) for the six month periods ending June 30, 2023 and 2022 were ($0.4) million and $0.1 million, respectively, and are reported within Other (expense) income, net on the Consolidated Statements of Income.

ITEM 4.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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

An evaluation was carried out under the supervision and with the participation of the Company’s management, including the principal executive officer and the principal financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this report on Form 10-Q. Based on that evaluation, the principal executive officer and the principal financial officer have concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2023.

Changes in Internal Control Over Financial Reporting

As of June 30, 2023, we are in the process of integrating the internal controls of the acquired Fill-Rite business into Gorman-Rupp’s existing operations as part of planned integration activities. In addition, we have implemented new processes and internal controls to assist us in the preparation and disclosure of financial information. There were no other changes in Gorman-Rupp’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, Gorman-Rupp’s internal control over financial reporting during the quarter ended June 30, 2023.

PART II. OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

There are no material changes from the legal proceedings previously reported in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

ITEM 1A.

RISK FACTORS

In addition to the information set forth in this report, you should carefully consider the risk factors disclosed in Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer purchases of its common shares during the second quarter of 2023 were:

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
April 1 to April 30, 2023		-		-		-	$	48,067
May 1 to May 31, 2023		-		-		-		48,067
June 1 to June 30, 2023		-		-		-		48,067
Total		-		-		-	$	48,067

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4.

MINE SAFETY DISCLOSURES.

Not applicable.

ITEM 5.

OTHER INFORMATION.

During the quarter ended June 30, 2023, no director or officer of the Company adopted or terminated any Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement, each as defined in Item 408 of Regulation S-K.

ITEM 6.

EXHIBITS

Exhibit 10.1

Amendment No. 1 dated as of June 30, 2023 to the Credit Agreement dated as of May 31, 2022

Exhibit 31.1

Certification of Scott A. King, President and Chief Executive Officer, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 31.2

Certification of James C. Kerr, Executive Vice President and Chief Financial Officer, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 32

Certification pursuant to 18 U.S.C Section 1350, as adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002

Exhibit 101

Financial statements from the Quarterly Report on Form 10-Q of The Gorman-Rupp Company for the quarter ended June 30, 2023, formatted in Inline eXtensible Business Reporting Language (XBRL): (i) the Consolidated Statements of Income, (ii) the Consolidated Statements of Comprehensive Income, (iii) the Consolidated Balance Sheets, (iv) the Consolidated Statements of Cash Flows, (v) the Consolidated Statements of Equity, and (vi) the Notes to Consolidated Financial Statements.

Exhibit 104

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	The Gorman-Rupp Company
		(Registrant)
Date: July 31, 2023
	By:	/s/James C. Kerr
		James C. Kerr
		Executive Vice President and Chief Financial Officer
		(Principal Financial Officer)