The Gorman-Rupp Company (NYSE:GRC): A Resilient Pump Manufacturer Navigating Market Challenges

Published on September 24, 2024 | Ticker: GRC

The Gorman-Rupp Company (NYSE:GRC) is a leading designer, manufacturer, and international marketer of pumps and pump systems for diverse applications across various industries. With a rich history spanning over a century, the company has established itself as a trusted provider of innovative solutions, consistently delivering high-quality products and reliable performance to its customers.

Business Overview

Gorman-Rupp's core business revolves around the design, manufacture, and marketing 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's diverse market exposure has been a key contributor to its generally stable financial growth over the years.

Gorman-Rupp's success is attributed to its focus on long-term product quality, applications, and performance, combined with timely delivery and service. The company continuously invests in employee training, new product development, and modern manufacturing equipment and technology to increase production efficiency, capacity, and drive growth through innovative solutions.

Financials

In the fiscal year 2023, Gorman-Rupp reported annual net income of $34,951,000 and annual revenue of $659,511,000. The company's annual operating cash flow stood at $98,225,000, while its annual free cash flow reached $77,390,000.

For the second quarter of 2024, Gorman-Rupp reported net sales of $169,513,000, a slight decrease of 0.9% compared to the same period in 2023. The company's gross profit for the quarter was $54,079,000, resulting in a gross margin of 31.9%, up from 30.2% in the prior-year quarter. This improvement was driven by a 280-basis-point reduction in cost of materials, partially offset by a 110-basis-point increase in labor and overhead expenses.

Operating income for the second quarter of 2024 was $26,049,000, representing an operating margin of 15.4%, up from 14.2% in the same period last year. The increase in operating margin was primarily due to the improved cost of materials, partially offset by higher labor, overhead, and selling, general, and administrative (SG&A) expenses.

Net income for the second quarter of 2024 was $8,335,000, or $0.32 per share, compared to $10,477,000, or $0.40 per share, in the prior-year quarter. Adjusted earnings per share, which excludes amortization of customer backlog, write-off of unamortized debt financing fees, and refinancing costs, was $0.54 per share for the second quarter of 2024, compared to $0.41 per share in the same period of 2023.

Liquidity

As of June 30, 2024, Gorman-Rupp had $34,245,000 in cash and cash equivalents and $400,000,000 in total debt outstanding, with $376,880,000 in long-term debt. The company's current ratio stood at 2.45, and its quick ratio was 1.44, indicating a strong liquidity position.

Gorman-Rupp's debt structure was recently refined through a series of transactions completed on May 31, 2024. The company upsized, amended, and extended its existing Senior Term Loan Facility from $350,000,000 to $370,000,000, amended and extended its existing $100,000,000 revolving Credit Facility, and issued $30,000,000 in new 6.40% Senior Secured Notes. The proceeds from these transactions, along with $10,000,000 of cash on hand, were used to retire the company's $90,000,000 unsecured Subordinated Credit Facility.

This refinancing is expected to result in significant interest expense savings for Gorman-Rupp going forward, as the company was able to extend and stagger its debt maturities. As of June 30, 2024, the company was in compliance with all of its debt covenants.

Geographical and Segmental Performance

Gorman-Rupp's international sales represented approximately 25% of total net sales for the second quarter of 2024 and 2023. The company attributes revenues to individual countries based on the customer location to which finished products are shipped.

In terms of end markets, the company experienced sales increases in the municipal (up $6,657,000 or 34.1%), OEM (up $2,204,000 or 23.2%), repair parts (up $633,000 or 3.4%), and petroleum (up $291,000 or 5.6%) markets during the second quarter of 2024. These increases were partially offset by decreases in the fire suppression (down $7,976,000 or 21.6%), agriculture (down $1,599,000 or 7.0%), industrial (down $1,192,000 or 3.3%), and construction (down $529,000 or 2.4%) markets.

The increase in municipal sales was driven by domestic flood control and wastewater projects related to increased infrastructure investment, while the fire suppression market experienced a decrease due to backlog returning to more normal levels after a strong performance in the prior-year quarter. The company's fire suppression incoming orders for the second quarter of 2024 were up 11.2% compared to the same period in 2023, indicating a potential rebound in this segment.

Outlook

Gorman-Rupp is focused on top-line growth through backlog reduction in the second half of 2024, as well as delivering strong gross margin and earnings. The company is pleased with the results of its previously announced refinancing, which is expected to result in significant interest expense savings going forward.

The company's backlog of orders stood at $224,400,000 as of June 30, 2024, compared to $249,800,000 at the same time last year and $218,100,000 at the end of 2023. Incoming orders for the first six months of 2024 were $341,400,000, an increase of 6.3% compared to the same period in 2023.

Risks and Challenges

Gorman-Rupp faces several risks and challenges, including the potential for loss of key personnel, intellectual property security concerns, integration challenges related to acquisitions, the impact of its indebtedness on its financial condition and operations, and general risks associated with the manufacturing industry, such as availability and costs of raw materials and labor, cybersecurity threats, and exposure to fluctuations in foreign currency exchange rates.

Recent Developments

The company recently completed a refinancing of its debt structure, which is expected to result in significant interest expense savings. This development positions Gorman-Rupp to better manage its financial obligations and potentially improve its profitability in the coming quarters.

Conclusion

The Gorman-Rupp Company has demonstrated its resilience as a leading pump manufacturer, navigating market challenges and delivering solid financial performance. The company's diverse market exposure, focus on innovation, and recent debt refinancing have positioned it well to capitalize on growth opportunities and continue its long-standing tradition of providing high-quality products and reliable service to its customers. As Gorman-Rupp continues to execute its strategic initiatives, investors will be closely watching the company's ability to maintain its competitive edge and drive sustainable growth in the years ahead.

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