The Gorman-Rupp Company

Three and Nine Months Ended September 30,March 31, 2022 and 2021 and 2020

PART I. FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS (UNAUDITED)

THE GORMAN-RUPP COMPANY

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

See notes to consolidated financial statements (unaudited).

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

See notes to consolidated financial statements (unaudited).

THE GORMAN-RUPP COMPANY

CONSOLIDATED BALANCE SHEETS

See notes to consolidated financial statements (unaudited).

THE GORMAN-RUPP COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

See notes to consolidated financial statements (unaudited).

THE GORMAN-RUPP COMPANY

CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)

See 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 ninemonths ended September 30, 2021March 31, 2022 are not necessarily indicative of results that may be expected for the year ending December 31, 2021.2022. 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, 2020,2021, from which related information herein has been derived.

COVID-19 Impact

In March 2020, the World Health Organization categorized the coronavirus (“COVID-19”) as a pandemic. While the near-term effects of the pandemic have negatively impacted our financial results, uncertainty over the economic and operational impacts of COVID-19 means the ultimate related financial impact cannot be reasonably estimated at this time. The Company’s Consolidated Financial Statements presented herein reflect estimates and assumptions made by management that affect the reported amounts of assets and liabilities and reported amounts of revenue and expenses during the reporting periods presented. Such estimates and assumptions affect, among other things, the Company’s goodwill, long-lived asset and indefinite-lived intangible asset valuation; inventory valuation; the allowance for doubtful accounts; and pension plan assumptions. The Company is not aware of any specific event or circumstance that would require an update to its estimates or judgments or a revision of the carrying value of its assets or liabilities as of the date of the financial statements included in this Quarterly Report on Form 10-Q. These estimates may change as new events occur and additional information is obtained.

NOTE 2 - RECENTLY ISSUED ACCOUNTING STANDARDS

The Company considers the applicability and impact of all Accounting Standard Updates (“ASUs”). All recently issued ASUsnot listed below were assessed and determined either to be not applicable or are expected to have minimal impact on the Company’s Consolidated Financial Statements.

Recently Adopted Accounting Standards

In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes”, which, as part of its Simplification Initiative to reduce the cost and complexity in accounting for income taxes, removes certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. ASU 2019-12 also amends other aspects of the guidance to help simplify and promote consistent application of GAAP. The guidance is effective for interim and annual periods beginning after December 15,2020, with early adoption permitted. The Company adopted ASU 2019-12 effective January 1, 2021 with no material impact on the Company’s Consolidated Financial Statements.

NOTE 3 – REVENUE

Disaggregation of Revenue

The following tables disaggregate total net sales by major product category and geographic location:

International sales represented approximately 33%29% and 29%30% of total net sales for the thirdfirst quarter of 20212022 and 20202021, respectively, and were made to customers in many different countries around the world.

On September 30, 2021,March 31, 2022, the Company had $156.5$195.5 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 September 30, 2021March 31, 2022 and December 31, 20202021 were as follows:

Revenue recognized for the ninethree months ended September 30, 2021March 31, 2022 and 20202021 that was included in the contract liabilities balance at the beginning of the period was $6.0$5.1 million and $4.4$3.8 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 $67.3$71.9 million and $63.5$70.1 million at September 30, 2021March 31, 2022 and December 31, 2020,2021, respectively. Allowances for excess and obsolete inventory totaled $5.9$6.1 million for each of the periods endedand $6.0 million at September 30, 2021March 31, 2022 and December 31, 2020.2021, 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:

NOTE 5 – PROPERTY, PLANT AND EQUIPMENT

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

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:

NOTE 7 - PENSION AND OTHER POSTRETIREMENT BENEFITS

The Company sponsors a defined benefit pension plan (“Plan”) covering certain domestic employees. Benefits are based on each covered employee’s years of service and compensation. The Plan is funded in conformity with the funding requirements of applicable U.S. regulations. The 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.

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:

During the three and nine months ended September 30, 2021, the Company recorded a settlement loss relating to retirees that received lump-sum distributions from the Company’s defined benefit pension plan totaling $0.4 million and $2.1 million, respectively. The Company recorded settlement losses of $1.0 million and $4.4 million for the three and nine month periods ended September 30, 2020, respectively. These charges were the result of lump-sum distributions to retirees exceeding the Plan’s actuarial service and interest cost thresholds.

NOTE 8 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)          

The reclassifications out of Accumulated other comprehensive income (loss) as reported in the Consolidated Statements of Income are:

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

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. During the three-month period ended March 31, 2022 the Company repurchased 24,546 shares for $0.9 million. NaN shares were repurchased during the three-month period ending March 31, 2021. As of March 31, 2022, the Company had $48.1 million available for repurchase under the share repurchase program.

NOTE 10– SUBSEQUENT EVENTS

On April 26, 2022 the Company entered into a definitive agreement to acquire the assets of Fill-Rite and Sotera (“Fill-Rite”), a division of Tuthill Corporation, for $525 million. When adjusted for approximately $80 million in expected tax benefits, the net transaction value is approximately $445 million. The Company expects to fund the transaction with cash on-hand and new debt. Subject to customary closing conditions and necessary regulatory approvals, the transaction is expected to close in the second quarter of 2022.

(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, 2020.2021. The coronavirus (COVID-19) pandemic has had an adverse effect on the Company’s reported results althoughin 2021 and while our facilities and supply chain have remained operational through the pandemic andchains continue to face challenges our reported results have startedcontinued to improve as the global economy further recovers from the pandemic.improve. The extent to which the Company’s operations will continue to be impacted by the pandemic will depend largely on future developments, which are highly uncertain and cannot be accurately predicted, including new information which may emerge concerning the severity of the pandemic and actions by government authorities to contain the pandemic or treat its impact, among other things.

Executive Overview

The following discussion of Results of Operations includes certain non-GAAP financial data and measures such as adjusted earnings before interest, taxes, depreciation and amortization and adjusted earnings per share amounts which exclude non-cash pension settlement charges in 2021 and 2020.amortization. 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 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. Provided below is a reconciliation of adjusted earnings per share amounts and adjusted earnings before interest, taxes, depreciation and amortization.

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

Gorman-Rupp actively pursues growth opportunities through organic growth, international business expansion and acquisitions.

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 for more than 85 years.historically.

The Company places a strong emphasis on cash flow generation and maintaining excellent liquidity and financial flexibility.liquidity. This focus has afforded us the ability to reinvest our cash resources and preserve a strong balance sheet and position us for future acquisitionin acquisitions and product development opportunities. The Company had no bank debt as of September 30, 2021. The Company’s cash position increased $22.9decreased $2.5 million during the first ninethree months of 20212022 to $131.1$123.0 million at September 30, 2021March 31, 2022 and the Company generated $40.3$12.5 million in adjusted earnings before interest, taxes, depreciation and amortization during the same period.

Capital expenditures for the first ninethree months of 20212022 were $5.6$3.5 million and consisted primarily of machinery and equipment and building improvements. Capital expenditures for the full-year 20212022 are presently planned to be approximately $10in the range of $15-$20 million primarily for building improvements and machinery and equipment purchases, and are expected to be financed through internally-generated funds.

Net salesThe Company’s backlog of orders was $195.5 million at March 31, 2022 compared to $125.5 million at March 31, 2021 and $186.0 million at December 31, 2021. Incoming orders increased 9.6% for the thirdfirst quarter of 2021 were $102.1 million compared to net sales of $89.0 million for the third quarter of 2020, an increase of 14.8% or $13.1 million. Domestic sales increased 8.6% or $5.4 million and international sales increased 30.0% or $7.7 million2022 compared to the same period in 2020. As2021. Incoming orders were up across most markets the global economy has started to recover from the COVID-19 pandemic, sales and incoming orders have increased across nearly all of our markets. 

Gross profit was $25.8 million for the third quarter of 2021, resulting in gross margin of 25.3%, compared to gross profit of $23.0 million and gross margin of 25.8% for the same period in 2020.  The 50 basis point decrease in gross margin was driven by a 210 basis point increase in cost of material, which included an unfavorable LIFO impact of 250 basis points, partially offset by a 160 basis point improvement on labor and overhead resulting from increased sales volume. 

Selling, general and administrative (“SG&A”) expenses were $14.3 million and 14.0% of net sales for the third quarter of 2021 compared to $13.2 million and 14.9% of net sales for the same period in 2020. SG&A expenses increased 8.0% or $1.1 million as a result of compensation, travel and other expense items returning closer to pre-pandemic levels as operational activities return to normal. SG&A expenses as a percentage of sales improved 90 basis points primarily as a result of leverage on fixed costs from increased sales volume.

Operating income was $11.5 million for the third quarter of 2021, resulting in an operating margin of 11.3%, compared to operating income of $9.7 million and operating margin of 10.9% for the same period in 2020. Operating margin improved 40 basis points as a result of improved leverage on fixed costs from increased sales volume partially offset by an unfavorable LIFO impact.

Other income (expense), net was $0.5 million of expense for the third quarter of 2021 compared to expense of $0.7 million for the same period in 2020. The decrease to expense was due primarily to reduced non-cash pension settlement charges of $0.4 million in the third quarter of 2021 compared to $1.0 million in the third quarter of 2020.

Net income was $8.8 million for the third quarter of 2021 compared to $7.3 million in the third quarter of 2020, and earnings per share were $0.34 and $0.28 for the respective periods. Earnings per share for the third quarter of 2021 included an unfavorable LIFO impact of $0.08 per share. Earnings per share for the third quarter included a non-cash pension settlement charge of $0.01 per share in 2021 and $0.03 per share in 2020.

Net sales for the first nine months of 2021 were $284.2 million compared to net sales of $266.5 million for the first nine months of 2020, an increase of 6.6% or $17.7 million. Domestic sales increased 4.0% or $7.5 million and international sales increased 13.0% or $10.2 million compared to the same period in 2020.

Gross profit was $73.5 million for the first nine months of 2021, resulting in gross margin of 25.9%, compared to gross profit of $68.3 million and gross margin of 25.6% for the same period in 2020.  The 30 basis points increase in gross margin compared to the first nine months of 2020 was driven by a 130 basis point improvement on labor and overhead resulting from increased sales volume, partially offset by a 100 basis point increase in cost of material which included an unfavorable LIFO impact of 90 basis points.  Company serves.

SG&A expenses were $42.4 million and 14.9% of net sales for the first nine months of 2021 compared to $41.0 million and 15.4% of net sales for the same period in 2020. SG&A expenses increased 3.6% or $1.4 million but improved 50 basis points as a percentage of sales primarily as a result of leverage on fixed costs from increased sales volume.

Operating income was $31.1 million for the first nine months of 2021, resulting in an operating margin of 11.0%, compared to operating income of $27.3 million and operating margin of 10.3% for the same period in 2020. Operating margin improved 70 basis points primarily as a result of improved leverage on fixed costs from increased sales volume partially offset by an unfavorable LIFO impact.

Other income (expense), net was $1.8 million of expense for the first nine months of 2021 compared to expense of $4.4 million for the same period in 2020. The decrease to expense was due primarily to reduced non-cash pension settlement charges of $2.1 million in 2021 compared to $4.4 million in 2020.

Net income was $23.3 million for the first nine months of 2021 compared to $18.4 million in the first nine months of 2020, and earnings per share were $0.89 and $0.70 for the respective periods. Earnings per share included an unfavorable LIFO impact of $0.12 per share in 2021 compared to $0.04 per share in 2020. Earnings per share included a non-cash pension settlement charge of $0.06 per share in 2021 and $0.13 per share in 2020.

The Company’s backlog of orders was $156.5 million at September 30, 2021 compared to $102.0 million at September 30, 2020 and $113.1 million at December 31, 2020. Incoming orders increased 24.8% for the first nine months of 2021 compared to the same period in 2020. Incoming orders during the third quarter of 2021 increased 32.0% when compared to the same period last year.

On OctoberApril 28, 2021,2022, the Board of Directors authorized the payment of a quarterly dividend of $0.17 per share on the common stock of the Company, payable DecemberJune 10, 2021,2022, to shareholders of record as of November 15, 2021.May 13, 2022. This will mark the 287th289th consecutive quarterly dividend paid by The Gorman-Rupp Company.

On April 26, 2022, the Company entered into a definitive agreement to acquire the assets of Fill-Rite, a division of Tuthill Corporation, for $525 million. When adjusted for approximately $80 million in expected tax benefits, the net transaction value is approximately $445 million.  The Company expects to fund the transaction with cash on-hand and new debt.  Subject to customary closing conditions and necessary regulatory approvals, the transaction is expected to close in the second quarter of 2022.  In connection with the anticipated closing of the transaction, the Company expects to enter into senior secured first lien credit facilities comprised of a $350 million term loan facility and a $100 million revolving credit facility, as well as an unsecured senior subordinated term loan facility in the amount of $90 million, subject to the satisfaction or waiver of customary conditions. The Company expects that it will incur no initial borrowings under the revolving credit facility in connection with anticipated closing of the transaction.

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.

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.

Outlook

Our salesWe continue to see top line growth across most of our markets and incoming ordersorder trends remain positive.  Although backlog is still at a historically high level, our aging is consistent.   While we have continued the positive trendsleveraged labor and overhead, inflationary pressures on cost of material persist, so we beganwill continue to see earlier in the year, and we enter the fourth quarter with a very strong backlog.  Our team has continuedadjust our pricing to do a good job managing the ongoing challenges of the COVID-19 pandemic, including those related to ouroffset these increases.   It appears that global supply chain.  As sales volumes have returnedchain challenges will extend into the foreseeable future.  We are navigating these challenges and believe we will be able to more normal levels, we have managed our gross margin and have leveraged our SG&A expenses, resulting in improved earnings.   While we continue to manage the uncertainties related to the global economic recovery, our management team also remains focused on long-term growth opportunities and strategic initiatives that will enable us to continue to deliver shareholder value.maintain top line growth.

Three Months Ended September 30, 2021March 31, 2022 vs. Three Months Ended September 30, 2020March 31, 2021

Net Sales

Net sales for the thirdfirst quarter of 20212022 were $102.1$102.2 million compared to net sales of $89.0 million for the thirdfirst quarter of 2020,2021, an increase of 14.8% or $13.1$13.2 million. Domestic sales of $72.4 million increased 8.6% or $5.4 million15.6% and international sales of $29.8 million increased 30.0% or $7.7 million12.8% compared to the same period in 2020. As the global economy has started to recover from the COVID-19 pandemic, sales and incoming orders2021. Sales have increased across nearly all of our markets. markets and incoming orders for the quarter increased 9.6% compared to the first quarter of 2021 to $112.0 million.

Sales in our water markets increased 14.6%11.5% or $9.3$7.5 million in the thirdfirst quarter of 20212022 compared to the thirdfirst quarter of 2020.2021. Sales increased $6.0$5.9 million in the fire protection market, $3.6$2.3 million in the construction market, $2.3and $1.6 million in the repair market, and $0.8 million in the agriculture market. Partially offsetting these increases was a sales decrease of $3.4$2.2 million in the municipal market and $0.1 million in the agriculture market. The decrease in municipal market sales is primarily due to timing, as both incomingIncoming orders and backlog have increasedfor the municipal and agriculture markets were up compared to the prior year.year period.

Sales in our non-water markets increased 15.2%23.3% or $3.8$5.7 million in the thirdfirst quarter of 20212022 compared to the thirdfirst quarter of 2020.2021. Sales increased $2.7$3.7 million in the industrial market, $1.7 million in the OEM market, $0.7 million in the industrial market, and $0.4$0.3 million in the petroleum market.

Cost of Products Sold and Gross Profit

Gross profit was $25.8$25.5 million for the thirdfirst quarter of 2021,2022, resulting in gross margin of 25.3%25.0%, compared to gross profit of $23.0 million and gross margin of 25.8%25.9% for the same period in 2020.2021. The 5090 basis point decrease in gross margin was driven by a 210200 basis point increase in cost of material, which included an unfavorable LIFO impact of 250100 basis points, partially offset by a 160110 basis point improvement onfrom labor and overhead resulting fromleverage due to increased sales volume.

Selling, General and Administrative (SG&A) Expenses

Selling, general and administrative (“SG&A”) expenses were $14.3$16.0 million and 14.0%15.7% of net sales for the thirdfirst quarter of 20212022 compared to $13.2$14.1 million and 14.9%15.8% of net sales for the same period in 2020.2021. SG&A expenses increased 8.0%14.0% or $1.1$1.9 million as a result of compensation,increased payroll and payroll related costs and increased travel and other expense items returning closer to pre-pandemic levels as operational activities return to normal.expenses. SG&A expenses as a percentage of sales improved 9010 basis points primarily as a result of leverage on fixed costs from increased sales volume.

Operating Income

Operating income was $11.5$9.5 million for the thirdfirst quarter of 2021,2022, resulting in an operating margin of 11.3%9.3%, compared to operating income of $9.7$9.0 million and operating margin of 10.9%10.1% for the same period in 2020.2021. Operating margin improved 40decreased 80 basis points primarily as a result of improved leverage on fixed costs fromthe increased sales volumecost of material due to unfavorable LIFO adjustments partially offset by an unfavorable LIFO impact.

Net Income

The Company’s effective tax rate was 20.6% for the third quarter of 2021 and 19.3% for the third quarter of 2020.

Net income was $8.8 million for the third quarter of 2021 compared to $7.3 million in the third quarter of 2020, and earnings per share were $0.34 and $0.28 for the respective periods. Earnings per share for the third quarter of 2021 included an unfavorable LIFO impact of $0.08 per share. Earnings per share for the third quarter included a non-cash pension settlement charge of $0.01 per share in 2021 and $0.03 per share in 2020.

Nine Months Ended September 30, 2021 vs. Nine Months Ended September 30, 2020

Net Sales