Notes to Consolidated Financial Statements
(Amounts in tables in thousands of dollars)
Note 1 – Summary of Significant Accounting Policies
General Information and Basis of Presentation
The Gorman-Rupp 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 Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles and include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated. Earnings per share are calculated based on the weighted-average number of common shares outstanding.
Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Actual results could differ from those estimates.
Cash Equivalents and Short-Term Investments
The Company considers highly liquid instruments with maturities of 90 days or less to be cash equivalents. The Company periodically makes short-term investments for which cost approximates fair value. Short-term investments at December 31, 2022 and 2021 consisted primarily of a certificate of deposit and is classified as Prepaid and other on the Consolidated Balance Sheets.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are stated at the historical carrying amount net of allowance for doubtful accounts. The Company maintains an allowance for doubtful accounts for expected losses from the failure of its customers to make required payments for products delivered. The Company estimates this allowance based on knowledge of the financial condition of customers, review of historical receivables and reserve trends, current economic conditions in the company’s major markets and geographies, and other relevant information.
Inventories
The majority of the Company’s inventories are valued on the last-in, first-out (LIFO) method and stated at the lower of cost or market. All other inventories are stated at the lower of cost or net realizable value with cost determined using the first-in, first-out (FIFO) method. Cost components include materials, inbound freight costs, labor and allocations of fixed and variable overheads on an absorption costing basis.
The costs for approximately 68% and 72% of inventories at December 31, 2022 and 2021, respectively, were determined using the last-in, first-out (LIFO) method. Current cost approximates replacement cost, or market, and LIFO cost is determined at the end of each fiscal year based on inventory levels on-hand at current replacement cost and a LIFO reserve. The Company uses the simplified LIFO method, under which the LIFO reserve is determined utilizing the inflation factor specified in the Producer Price Index for Machinery and Equipment – Pumps, Compressors and Equipment, as published by the U.S. Bureau of Labor Statistics. Interim LIFO calculations are based on management’s estimate of the expected year-end inflation index and, as such, are subject to adjustment each quarter including the fourth quarter when the inflation index for the year is finalized. When inflation increases, the LIFO reserve and non-cash expense increase.
Property, plant and equipment
Property, plant and equipment are stated on the basis of cost. Repairs and maintenance costs are expensed as incurred. Depreciation for property, plant and equipment assets is computed using the straight-line method over the estimated useful lives of the assets and is included in Cost of products sold and Selling, general and administrative expenses based on the use of the assets. Depreciation expense was $13.3 million, $11.2 million, and $11.4 million for 2022, 2021, and 2020, respectively.
Depreciation of property, plant and equipment is determined based on the following lives:
|
|
Years |
|
Buildings
|
|
20 |
- |
50 |
|
Machinery and equipment
|
|
5 |
- |
15 |
|
Software
|
|
3 |
- |
5 |
|
Property, plant and equipment consist of the following:
|
|
2022
|
|
|
2021
|
|
Land
|
|
$ |
6,215 |
|
|
$ |
5,813 |
|
Buildings
|
|
|
119,197 |
|
|
|
112,760 |
|
Machinery and equipment
|
|
|
212,581 |
|
|
|
188,123 |
|
|
|
|
337,993 |
|
|
|
306,696 |
|
Less accumulated depreciation
|
|
|
(209,353 |
) |
|
|
(202,403 |
) |
Property, plant and equipment, net
|
|
$ |
128,640 |
|
|
$ |
104,293 |
|
Property, plant and equipment are evaluated for impairment whenever events or changes in circumstances indicate the carrying amount may not be recovered through future net cash flows generated by the assets. Impairment losses may be recorded when the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amounts based on the excess of the carrying amounts over the estimated fair value of the assets. The Company was not aware of any events or changes in circumstances that indicated the carrying value of its property, plant and equipment may not be recoverable.
Goodwill and Identifiable Intangible Assets
Goodwill
Goodwill represents the excess of the cost of acquired businesses over the fair value of tangible assets and identifiable intangible assets purchased and liabilities assumed.
Goodwill is reviewed annually for impairment as of October 1 or whenever events or changes in circumstances indicate there may be a possible permanent loss of value using either a quantitative or qualitative analysis. For certain reporting units, the Company performs a quantitative analysis using both a market-based approach and a discounted cash flow model to estimate the fair value of our reporting units. This process requires significant judgements, including estimation of future cash flows, which is dependent on internal forecasts. The Company may otherwise elect to perform a qualitative analysis when deemed appropriate. A qualitative analysis may be performed by assessing certain trends and factors, including projected market outlook and growth rates, forecasted and actual sales and operating profit margins, discount rates, industry data and other relevant qualitative factors. These trends and factors are compared to, and based on, the assumptions used in the most recent quantitative assessment.
No impairment charges were recognized in any of the Company’s reporting units in 2022, 2021, or 2020. See Note 11 to the Consolidated Financial Statements, Goodwill and Other Intangible Assets.
Identifiable intangible assets
The Company’s primary identifiable intangible assets include customer relationships, technology and drawings, and trade names and trademarks. Identifiable intangible assets with finite lives are amortized and those identifiable intangible assets with indefinite lives are not amortized. Amortization for finite-lived intangible assets is computed using the straight-line method over the estimated useful lives of the assets and is included in Cost of products sold and Selling, general and administrative expenses based on the use of the assets. Amortization of finite-lived intangible assets is determined based on the following lives:
|
|
Years |
|
Technology and drawings
|
|
13 |
- |
20 |
|
Customer relationships
|
|
9 |
- |
20 |
|
Other intangibles
|
|
2 |
- |
18 |
|
Identifiable intangible assets that are subject to amortization are evaluated for impairment whenever events or changes in circumstances indicate the carrying amount may not be recovered through future net cash flows generated by the assets. Impairment losses may be recorded when the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amounts based on the excess of the carrying amounts over the estimated fair value of the assets. The Company was not aware of any events or changes in circumstances that indicated the carrying value of its finite-lived intangible assets may not be recoverable.
Identifiable intangible assets not subject to amortization are tested for impairment annually or more frequently if events warrant. The fair value of these assets is determined using a royalty relief methodology similar to that employed when the associated assets were acquired, but using updated estimates of future sales, cash flows and profitability. For 2022, 2021 and 2020, the fair value of indefinite lived intangible assets exceeded their carrying values.
For additional information about goodwill and other intangible assets, see Note 11 to the Consolidated Financial Statements, Goodwill and Other Intangible Assets.
Acquisitions
The Company allocates the purchase price of its acquisitions to the assets acquired, liabilities assumed, and noncontrolling interests based upon their respective fair values at the acquisition date. The Company utilizes management estimates and inputs from an independent third-party valuation firm to assist in determining these fair values.
The Company uses the income, market or cost approach (or a combination thereof) for the valuation as appropriate. The valuation inputs in these models and analyses are based on market participant assumptions. Management values property, plant and equipment using the cost approach supported where available by observable market data, which includes consideration of obsolescence. Management values acquired intangible assets using the relief from royalty method or excess earnings method, which are forms of the income approach supported by observable market data for peer companies. The significant assumptions used to estimate the value of the acquired intangible assets include discount rates and certain assumptions that form the basis of future cash flows (such as revenue growth rates, EBITDA margins, customer attrition rates, and royalty rates), which are considered Level 3 assets as the assumptions are unobservable inputs developed by the Company. Acquired inventories are recorded at fair value. For certain items, the carrying value is determined to be a reasonable approximation of fair value based on information available to the Company.
The excess of the acquisition price over estimated fair values is recorded as goodwill. Goodwill is adjusted for any changes to acquisition date fair value amounts made within the measurement period. Acquisition-related transaction costs are recognized separately from the business combination and expensed as incurred. See Note 2 to the Consolidated Financial Statements, “Acquisitions”.
Revenue Recognition
The Company recognizes revenue when it transfers control of promised goods or services to its customers in an amount that reflects the consideration to which it expects to be entitled to in exchange for those goods or services.
Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct product or service to a customer, and is the unit of account in ASC 606. The transaction price for a customer contract is allocated to each distinct performance obligation and recognized as revenue when, or as, the Company’s performance obligation is satisfied. For product sales, other than long-term construction-type contracts, the Company recognizes revenue once control has passed at a point in time, which is generally when products are shipped. Payments received for product sales typically occur following delivery and the satisfaction of the performance obligation based upon the terms outlined in the contracts. Substantially all of our customer contracts are fixed-price contracts and the majority of our customer contracts have a single performance obligation, as the promise to transfer the individual products or services is not separately identifiable from other promises in the contract. For customer contracts with multiple performance obligations, the Company allocates revenue to each performance obligation based on its relative standalone selling price, which is generally determined based on standalone selling prices charged to customers or using expected cost plus margin.
All of the Company's performance obligations, and associated revenue, are generally transferred to customers at a point in time, with the exception of certain highly customized pump products, which are transferred to the customer over time.
The Company offers standard warranties for its products to ensure that its products comply with agreed-upon specifications in its contracts. For standard warranties, these do not give rise to performance obligations and represent assurance-type warranties.
Shipping and handling activities related to products sold to customers, whether performed before or after the customer obtains control of the products, are generally accounted for as activities to fulfill the promise to transfer the products and not as a separate performance obligation.
Contract Estimates
Accounting for long-term contracts involves the use of various techniques to estimate total contract revenue and costs. For long-term contracts, the Company estimates the profit on a contract as the difference between the total estimated revenue and expected costs to complete a contract and recognizes that profit as performance obligations are satisfied. Contract estimates are based on various assumptions to project the outcome of future events that could span longer than one year. These assumptions include labor productivity and availability, the complexity of the work to be performed, the cost and availability of materials, and the performance of subcontractors as applicable.
As a significant change in one or more of these estimates could affect the profitability of our contracts, the Company reviews and updates its contract-related estimates regularly. Adjustments in estimated profit on contracts are accounted for under the cumulative catch-up method. Under this method, the impact of the adjustment on profit recorded to date on a contract is recognized in the period the adjustment is identified. Revenue and profit in future periods of contract performance are recognized using the adjusted estimate.
Contract Balances
The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (contract assets), and customer advances and deposits (contract liabilities) on the Consolidated Balance Sheets. For certain highly customized pump products, revenue is recognized over time before the customer is invoiced, resulting in contract assets. Sometimes the Company receives advances or deposits from its customers before revenue is recognized, resulting in contract liabilities. These contract assets and liabilities are reported on the Consolidated Balance Sheets as a component of Other assets and Deferred revenue and customer deposits, respectively, on a contract-by-contract basis at the end of each reporting period.
Income Taxes
Income tax expense includes United States federal, state, local and international income taxes. Deferred tax assets and liabilities are recognized for the tax consequences of temporary differences between the financial reporting and the tax basis of existing assets and liabilities and for loss carryforwards. The tax rate used to determine the deferred tax assets and liabilities is the enacted tax rate for the year and manner in which the differences are expected to reverse. Valuation allowances are recorded to reduce deferred tax assets to the amount that will more likely than not be realized.
The Company accounts for the global intangible low-taxed income (“GILTI”) tax in the period in which it is incurred.
Pension and Other Postretirement Benefits
The Company sponsors defined benefit pension plans covering certain domestic employees. Additionally, the Company sponsors defined contribution pension plans made available to all domestic and Canadian employees.
The Company also sponsors a non-contributory defined benefit postretirement health care plan that provides health benefits to certain domestic and Canadian retirees and their spouses. The Company funds the cost of these benefits as incurred.
The determination of the Company’s obligation and expense for pension and other postretirement benefits is dependent on its selection of certain assumptions used by actuaries in calculating such amounts, which are described in Note 10, Pensions and Other Postretirement Benefits. The Company recognizes the funded status of its defined benefit pension plan as an asset or liability in the Consolidated Balance Sheets and recognizes the change in the funded status in the year in which the change occurs through accumulated other comprehensive loss in the Consolidated Balance Sheets.
Concentration of Credit Risk
The Company generally does not require collateral from its customers and has a very good collection history. There were no sales to a single customer that exceeded 10% of total net sales for the years ended December 31, 2022, 2021 or 2020.
Shipping and Handling Costs
The Company classifies all amounts billed to customers for shipping and handling as revenue and reflects related shipping and handling costs in Cost of products sold.
Advertising
The Company expenses all advertising costs as incurred, which for the years ended December 31, 2022, 2021 and 2020 totaled $3.3 million, $1.9 million, and $2.1 million, respectively.
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 warranty liability are:
|
|
2022
|
|
|
2021
|
|
|
2020
|
|
Balance at beginning of year
|
|
$ |
1,637 |
|
|
$ |
1,361 |
|
|
$ |
1,438 |
|
Provision
|
|
|
1,590 |
|
|
|
1,813 |
|
|
|
1,350 |
|
Acquired
|
|
|
646 |
|
|
|
- |
|
|
|
- |
|
Claims
|
|
|
(1,900 |
) |
|
|
(1,537 |
) |
|
|
(1,427 |
) |
Balance at end of year
|
|
$ |
1,973 |
|
|
$ |
1,637 |
|
|
$ |
1,361 |
|
Stock based compensation
The Company awards shares pursuant to The Gorman-Rupp Company 2015 Omnibus Incentive Plan. Performance Stock Units (“PSU’s”) are typically conditioned upon achievement of appropriate performance metrics. PSU’s that have been granted will vest and be awarded at the end of a two or three-year performance period based on the levels of achievement of compound annual growth targets for operating income and shareholder’s equity. The Company recognizes compensation expense for PSU’s based on the stock price at the date of the grant using the straight-line amortization method, over the vesting period specified in the grants, and the probability of achieving the performance targets. Restricted Stock Units (RSU’s) are valued at the stock price on the date of the grant. The majority of RSU’s vest pro rata over a period of 3 years. For both PSU’s and RSU’s, upon vesting the Company issues common stock from treasury. The Company recognized stock based compensation expense of $3.0 million for the year ended December 31, 2022, $2.0 million in expense of the year ended December 31, 2021 and $0.3million benefit for the year-ended December 31, 2020. The Company accounts for forfeitures as they occur, rather than estimating expected forfeitures.
Foreign Currency Translation
Assets and liabilities of the Company’s operations outside the United States which are accounted for in a functional currency other than U.S. dollars are translated into U.S. dollars using year-end exchange rates. Revenues and expenses are translated at weighted-average exchange rates effective during the year. Foreign currency translation gains and losses are included as a component of Accumulated other comprehensive loss within Equity.
Gains and losses resulting from foreign currency transactions, the amounts of which are not material, are included in Other (expense) income, net.
Fair Value
The carrying value of Cash and cash equivalents, Accounts receivable and Accounts payable approximates fair value based on the short-term nature of these instruments. 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. The Company does not recognize any non-financial assets at fair value.
Derivative Financial Instruments
The Company uses interest rate swap agreements to partially reduce risks related to floating rate financing agreements that are subject to changes in the market rate of interest. Terms of the interest rate swap agreements require the Company to receive a variable interest rate and pay a fixed interest rate. The Company’s interest rate swap agreements and its variable rate financings are predominately based upon an Adjusted Term SOFR Rate. For cash flow hedges, the Company formally assesses, both at inception and on a quarterly basis thereafter, whether the designated derivative instrument is highly effective in offsetting changes in cash flows of the hedged item. Changes in the fair value of interest rate swap agreements that are effective as hedges are recorded in Accumulated Other Comprehensive Income (AOCI). Deferred gains or losses are reclassified from AOCI to the Consolidated Statements of Operations in the same period as the gains or losses from the underlying transactions are recorded and are generally recognized in interest expense. The Company discontinues hedge accounting prospectively when the derivative is not highly effective as a hedge, the underlying hedged transaction is no longer probable, or the hedging instrument expires, or is sold, terminated or exercised.
Cash flows from hedging activities are reported in the Consolidated Statements of Cash Flows in the same classification as the hedged item, generally as a component of cash flows from operations.
New Accounting Pronouncements
The Company considers the applicability and impact of all Accounting Standard Updates (“ASUs”). All recently issued ASUs were assessed and determined either to be not applicable or are expected to have minimal impact on the Company’s Consolidated Financial Statements.
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 the secured Senior Term Loan Facility, $90.0 million from the unsecured Subordinated Credit Facility, $5.0 million from the revolving Credit Facility, and $83.0 million of cash on hand. Refer to “Note 6 – 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 $87.4 million in net sales and $6.4 million in operating income that was included in the Company’s consolidated financial statements for the year ended December 31, 2022. Operating income included $1.4 million of inventory step up amortization and $1.5 million of acquired customer backlog amortization in addition to the $7.0 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. These preliminary estimates may be revised during the measurement period as third-party valuations are finalized, additional information becomes available and as additional analyses are performed, and these differences could have a material impact on our results of operations and financial position.
The purchase price of Fill-Rite will be allocated to the acquired assets and liabilities at fair value. The following table presents the preliminary assets acquired and liabilities assumed and will be finalized pending completion of purchase accounting matters:
Accounts receivable
|
|
$ |
21,273 |
|
Inventory
|
|
|
12,214 |
|
Customer backlog (amortized within one 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 (indefinite-lived)
|
|
|
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 $7.1 million for the year ended December 31, 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):
|
|
Year ended December 31,
|
|
|
|
2022
|
|
|
2021
|
|
Net sales
|
|
$ |
586,101 |
|
|
$ |
510,621 |
|
Operating income
|
|
$ |
57,248 |
|
|
$ |
41,177 |
|
Net income
|
|
$ |
15,264 |
|
|
$ |
13,589 |
|
Earnings per share
|
|
$ |
0.59 |
|
|
$ |
0.52 |
|
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. The proforma results for the year ended 2021 include $4.0 million in non-recurring costs related to inventory step up amortization and customer backlog amortization.
Note 3 – Allowance for Doubtful Accounts
The allowance for doubtful accounts was $0.5 million at December 31, 2022 and $0.2 million at December 31, 2021.
Note 4 – Revenue
Disaggregation of Revenue
The following tables disaggregate total net sales by major product category and geographic location:
Product Category
|
|
|
|
2022
|
|
|
2021
|
|
|
2020
|
|
Pumps and pump systems
|
|
$ |
458,890 |
|
|
$ |
321,263 |
|
|
$ |
300,906 |
|
Repair parts for pumps and pump systems and other
|
|
|
62,137 |
|
|
|
57,053 |
|
|
|
48,061 |
|
Total net sales
|
|
$ |
521,027 |
|
|
$ |
378,316 |
|
|
$ |
348,967 |
|
Geographic Location
|
|
|
|
2022
|
|
|
2021
|
|
|
2020
|
|
United States
|
|
$ |
381,306 |
|
|
$ |
260,683 |
|
|
$ |
246,913 |
|
Foreign countries
|
|
|
139,721 |
|
|
|
117,633 |
|
|
|
102,054 |
|
Total net sales
|
|
$ |
521,027 |
|
|
$ |
378,316 |
|
|
$ |
348,967 |
|
International sales represented approximately 27% of total net sales for 2022, 31% for 2021 and 29% for 2020, and were made to customers in many different countries around the world.
On December 31, 2022, the Company had $267.4 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 December 31, 2022 and 2021 were as follows:
|
|
December 31,
2022
|
|
|
December 31,
2021
|
|
Contract assets
|
|
$ |
- |
|
|
$ |
- |
|
Contract liabilities
|
|
|
6,740 |
|
|
|
9,200 |
|
Revenue recognized for the year ended December 31, 2022 that was included in the contract liability balance at December 31, 2021 was $9.1 million. Revenue recognized for the year ended December 31, 2021 that was included in the contract liability balance at December 31, 2020 was $7.4 million.
Note 5 – 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 $88.2 million and $70.1 million at December 31, 2022 and 2021, respectively. Allowances for excess and obsolete inventory totaled $7.2 million at December 31, 2022 and $6.0 million at December 31, 2021.
Pre-tax LIFO expense was $18.0 million, $6.7 million, and $1.0 million for the years ended December 31, 2022, 2021, and 2020, respectively.
Inventories are comprised of the following:
Inventories, net
|
|
December 31,
2022
|
|
|
December 31,
2021
|
|
Raw materials and in-process
|
|
$ |
40,448 |
|
|
$ |
23,263 |
|
Finished parts
|
|
|
57,224 |
|
|
|
52,039 |
|
Finished products
|
|
|
13,461 |
|
|
|
10,346 |
|
Total net inventories
|
|
$ |
111,133 |
|
|
$ |
85,648 |
|
Note 6 – Financing Arrangements
Debt consisted of:
Senior Secured Credit Agreement
|
|
December 31, 2022
|
|
Senior term loan facility
|
|
$ |
341,250 |
|
Credit facility
|
|
|
17,000 |
|
Subordinated Credit Agreement
|
|
|
|
|
Subordinated credit facility
|
|
|
90,000 |
|
Total debt
|
|
|
448,250 |
|
Unamortized discount and debt issuance fees
|
|
|
(11,423 |
) |
Total debt, net
|
|
|
436,827 |
|
Less: current portion of long-term debt
|
|
|
(17,500 |
) |
Total long-term debt, net
|
|
$ |
419,327 |
|
Maturities of long-term debt in the next five fiscal years, and the remaining years thereafter, are as follows:
2023
|
|
|
2024
|
|
|
2025
|
|
|
2026
|
|
|
2027
|
|
|
Total
|
|
$ |
17,500 |
|
|
$ |
21,875 |
|
|
$ |
30,625 |
|
|
$ |
35,000 |
|
|
$ |
343,250 |
|
|
$ |
448,250 |
|
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 total borrowing under the Credit Facility as of December 31, 2022 was $17.0 million. 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 December 31, 2022, the applicable interest rate under the Senior Secured Credit Agreement was Adjusted Term SOFR plus 2.50%.
The Senior Secured Credit Agreement requires the Company to maintain a consolidated senior secured net leverage ratio not to exceed 4.50 to 1.00 for each of the four consecutive fiscal quarter periods ending June 30, 2022, September 30, 2022, December 31, 2022 and March 31, 2023, decreasing to 4.00 to 1.00 for each of the four consecutive fiscal quarter periods ending June 30, 2023 and September 30, 2023, and decreasing to 3.50 to 1.00 for the four consecutive fiscal quarter period ending December 31, 2023 and each of the four consecutive fiscal quarter periods ending thereafter.
The Senior Secured Credit Agreement requires the Company to maintain a consolidated total net leverage ratio not to exceed 5.75 to 1.00 for each of the four consecutive fiscal quarter periods ending June 30, 2022, September 30, 2022, December 31, 2022 and March 31, 2023, decreasing to 5.25 to 1.00 for each of the four consecutive fiscal quarter periods ending June 30, 2023 and September 30, 2023, and decreasing to 4.75 to 1.00 for the four consecutive fiscal quarter period ending December 31, 2023 and each of the four consecutive fiscal quarter periods ending thereafter.
The Senior Secured Credit Agreement requires the Company to maintain a fixed charge coverage ratio (commencing with the fiscal quarter ending June 30, 2022) of not less than 1.20 to 1.00 for any four consecutive fiscal quarter period.
The Senior Secured Credit Agreement contains customary affirmative and negative covenants, including among others, limitations on the Company and its subsidiaries with respect to incurrence of liens and indebtedness, disposition of assets, mergers, transactions with affiliates, and the ability to make or pay dividends in excess of certain thresholds.
The Senior Secured Credit Agreement also contains customary provisions requiring mandatory prepayments, including among others, annual prepayments (beginning with the fiscal year ending December 31, 2023) of a percentage of excess cash flow, prepayments of the net cash proceeds from any non-ordinary course sale of assets, and net cash proceeds of any non-permitted indebtedness.
Subordinated Credit Agreement
On May 31, 2022, the Company entered into an unsecured subordinated credit agreement (“Subordinated Credit Agreement”) with one lender, 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 December 31, 2022 borrowings under the Subordinated Credit Facility bear interest at an Adjusted Term SOFR Rate plus 9.1%.
The Subordinated Credit Agreement requires the Company to maintain a consolidated senior secured net leverage ratio not to exceed 5.40 to 1.00 for each of the four consecutive fiscal quarter periods ending June 30, 2022, September 30, 2022, December 31, 2022 and March 31, 2023, decreasing to 4.80 to 1.00 for each of the four consecutive fiscal quarter periods ending June 30, 2023 and September 30, 2023, and decreasing to 4.20 to 1.00 for the four consecutive fiscal quarter period ending December 31, 2023 and each of the four consecutive fiscal quarter periods ending thereafter.
The Subordinated Credit Agreement requires the Company to maintain a consolidated total net leverage ratio not to exceed 6.90 to 1.00 for each of the four consecutive fiscal quarter periods ending June 30, 2022, September 30, 2022, December 31, 2022 and March 31, 2023, decreasing to 6.30 to 1.00 for each of the four consecutive fiscal quarter periods ending June 30, 2023 and September 30, 2023, and decreasing to 5.70 to 1.00 for the four consecutive fiscal quarter period ending December 31, 2023 and each of the four consecutive fiscal quarter periods ending thereafter.
The Subordinated Credit Agreement contains customary affirmative and negative covenants, including among others, limitations on the Company and its subsidiaries with respect to incurrence of liens and indebtedness, disposition of assets, mergers, transactions with affiliates, and the ability to make or pay dividends in excess of certain thresholds.
The Subordindated Credit Agreement also contains customary provisions requiring mandatory prepayments, including among others, annual prepayments (beginning with the fiscal year ending December 31, 2023) of a percentage of excess cash flow, prepayments of the net cash proceeds from any non-ordinary course sale of assets, and net cash proceeds of any non-permitted indebtedness.
Credit Facilities
With the opening of the Senior Term Loan Facility, which included the revolving Credit Facility, the Company terminated its previously existing $20.0 million line of credit maturing in February 2024, $6.5 million unsecured bank line of credit maturing in May 2024, and $3.0 million bank guarantee dated June 2016.
Other
The Company incurred total issuance costs of approximately $15.2 million related to the Senior Secured Credit Agreement and Subordinated Credit Agreement. Of this amount, the Company determined that $12.8 million related to the Senior Term Loan Facility and the Subordinated Credit Facility and $2.4 million related to the Credit Facility. The portion of the issuance costs related to the Credit Facility is included in Other assets in the Consolidated Balance Sheet. These costs are being amortized to interest expense over the respective terms.
Total interest paid was $17.4 million in 2022. No interest was paid in 2021 or 2020.
The Company was in compliance with all debt covenants as of December 31, 2022.
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 December 31:
|
|
Notional Amount
|
|
|
Average Fixed Rate
|
|
|
Remaining Term at
|
|
|
2022
|
|
|
2021
|
|
|
2022
|
|
|
2021
|
|
|
December 31, 2022 |
Interest rate swaps
|
|
$ |
170,600 |
|
|
|
- |
|
|
|
4.1 |
% |
|
|
- |
% |
|
Extending to May 2027
|
The fair value of the Company’s interest rate swaps was 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. There were no interest rate swaps in place as of December 31, 2021. 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 December 31, 2022 are expected to continue to be effective hedges.
The following table summarizes the fair value of derivative instruments as of December 31, as recorded in the Consolidated Balance Sheets:
|
|
2022
|
|
|
2021
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Prepaid and Other
|
|
$ |
1,203 |
|
|
$ |
- |
|
Long-term liabilities:
|
|
|
|
|
|
|
|
|
Other long-term liabilities
|
|
|
(2,012 |
) |
|
|
- |
|
Total derivatives
|
|
$ |
(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
|
|
|
|
|
|
2022
|
|
|
2021
|
|
|
2020
|
|
Interest rate swaps
|
|
Interest Expense
|
|
$ |
(43 |
) |
|
$ |
- |
|
|
$ |
- |
|
The effects of derivative instruments on the Company’s Consolidated Statements of Results of Operations and Comprehensive Income (Loss) for OCI for the years ended December 31, 2021, 2020 and 2019 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*)
|
|
|
|
2022
|
|
|
2021
|
|
|
2020
|
|
|
|
2022
|
|
|
2021
|
|
|
2020
|
|
Interest rate swaps
|
|
$ |
(809 |
) |
|
$ |
- |
|
|
$ |
- |
|
Interest expense
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Note 7 – Leases
The Company is currently a lessee under a number of operating leases and two finance leases for certain offices, manufacturing facilities, land, office equipment and automobiles, none of which are material to its operations. The Company’s leases generally have remaining lease terms of 1 year to 5 years, some of which include options to extend the leases for up to 5 years, and some of which include options to terminate the leases within one year. These leases do not have significant rent escalation holidays, concessions, leasehold improvement incentives, or other build-out clauses. Further, the leases do not contain contingent rent provisions.
Supplemental information related to leases and the Company’s Consolidated Financial Statements is as follows:
|
|
2022
|
|
|
2021
|
|
Components of lease costs: |
|
|
|
|
|
|
|
|
Operating lease costs
|
|
$ |
621 |
|
|
$ |
450 |
|
Short-term lease costs
|
|
|
673 |
|
|
|
322 |
|
Finance lease costs
|
|
|
135 |
|
|
|
140 |
|
Total lease costs
|
|
$ |
1,429 |
|
|
$ |
912 |
|
|
|
December 31,
2022
|
|
|
December 31,
2021
|
|
Weighted average remaining lease term (years): |
|
|
|
|
|
|
|
|
Operating leases
|
|
|
2.4 |
|
|
|
1.8 |
|
Finance leases
|
|
|
1.3 |
|
|
|
2.3 |
|
Weighted average discount rate: |
|
|
|
|
|
|
|
|
Operating leases
|
|
|
3.25 |
% |
|
|
3.25 |
% |
Finance leases
|
|
|
3.25 |
% |
|
|
3.25 |
% |
|
|
December 31, 2022
|
|
|
|
Operating
Leases
|
|
|
Financing
Leases
|
|
|
Total
Leases
|
|
Other assets - right-of-use assets
|
|
$ |
2,010 |
|
|
$ |
170 |
|
|
$ |
2,180 |
|
Lease liabilities included in: |
|
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses - current portion of lease liabilities
|
|
$ |
980 |
|
|
$ |
130 |
|
|
$ |
1,110 |
|
Other long-term liabilities - non-current portion of lease liabilities
|
|
|
1,020 |
|
|
|
50 |
|
|
|
1,070 |
|
Total lease liabilities
|
|
$ |
2,000 |
|
|
$ |
180 |
|
|
$ |
2,180 |
|
|
|
December 31, 2021
|
|
|
|
Operating
Leases
|
|
|
Financing
Leases
|
|
|
Total
Leases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets - right-of-use assets
|
|
$ |
840 |
|
|
$ |
300 |
|
|
$ |
1,140 |
|
Lease liabilities included in: |
|
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses - current portion of lease liabilities
|
|
$ |
450 |
|
|
$ |
130 |
|
|
$ |
580 |
|
Other long-term liabilities - non-current portion of lease liabilities
|
|
|
380 |
|
|
|
180 |
|
|
|
560 |
|
Total lease liabilities
|
|
$ |
830 |
|
|
$ |
310 |
|
|
$ |
1,140 |
|
Maturities of lease liabilities are as follows:
|
|
December 31, 2022
|
|
2023
|
|
$ |
1,217 |
|
2024
|
|
|
792 |
|
2025
|
|
|
286 |
|
2026
|
|
|
42 |
|
2027
|
|
|
3 |
|
Thereafter
|
|
|
8 |
|
Total lease payments
|
|
|
2,348 |
|
Less: Interest
|
|
|
(168 |
) |
Present value of lease liabilities
|
|
$ |
2,180 |
|
|
|
December 31, 2021
|
|
2022
|
|
$ |
607 |
|
2023
|
|
|
422 |
|
2024
|
|
|
123 |
|
2025
|
|
|
25 |
|
2026
|
|
|
1 |
|
Thereafter
|
|
|
9 |
|
Total lease payments
|
|
|
1,187 |
|
Less: Interest
|
|
|
(47 |
) |
Present value of lease liabilities
|
|
$ |
1,140 |
|
Note 8 – Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive 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, 2019
|
|
$ |
(8,155 |
)
|
|
$ |
- |
|
|
$
|
(20,382 |
) |
|
$
|
(28,537 |
) |
Reclassification adjustments
|
|
|
- |
|
|
|
- |
|
|
|
7,049 |
|
|
|
7,049 |
|
Current period benefit (charge)
|
|
|
3,111 |
|
|
|
- |
|
|
|
(13,510 |
) |
|
|
(10,399 |
) |
Income tax benefit
|
|
|
- |
|
|
|
- |
|
|
|
1,510 |
|
|
|
1,510 |
|
Balance at December 31, 2020
|
|
|
(5,044 |
) |
|
|
- |
|
|
|
(25,333 |
) |
|
|
(30,377 |
) |
Reclassification adjustments
|
|
|
- |
|
|
|
- |
|
|
|
4,788 |
|
|
|
4,788 |
|
Current period benefit (charge)
|
|
|
(2,807 |
) |
|
|
- |
|
|
|
(1,045 |
) |
|
|
(3,852 |
) |
Income tax charge
|
|
|
- |
|
|
|
- |
|
|
|
(889 |
) |
|
|
(889 |
) |
Balance at December 31, 2021
|
|
|
(7,851 |
) |
|
|
- |
|
|
|
(22,479 |
) |
|
|
(30,330 |
) |
Reclassification adjustments
|
|
|
- |
|
|
|
(43 |
) |
|
|
8,519 |
|
|
|
8,476 |
|
Current period benefit (charge)
|
|
|
(2,768 |
) |
|
|
(766 |
) |
|
|
3,610 |
|
|
|
76 |
|
Income tax benefit (charge)
|
|
|
- |
|
|
|
192 |
|
|
|
(2,888 |
) |
|
|
(2,696 |
) |
Balance at December 31, 2022
|
|
$ |
(10,619 |
) |
|
$ |
(617 |
) |
|
$ |
(13,238 |
) |
|
$ |
(24,474 |
) |
Note 9 – Income Taxes
The components of Income before income taxes are:
|
|
2022
|
|
|
2021
|
|
|
2020
|
|
United States
|
|
$ |
6,270 |
|
|
$ |
30,973 |
|
|
$ |
28,493 |
|
Foreign countries
|
|
|
7,602 |
|
|
|
6,275 |
|
|
|
2,753 |
|
Total
|
|
$ |
13,872 |
|
|
$ |
37,248 |
|
|
$ |
31,246 |
|
The components of income tax expense are:
|
|
2022
|
|
|
2021
|
|
|
2020
|
|
Current expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$ |
1,581 |
|
|
$ |
5,174 |
|
|
$ |
4,058 |
|
Foreign
|
|
|
1,264 |
|
|
|
1,087 |
|
|
|
353 |
|
State and local
|
|
|
918 |
|
|
|
1,086 |
|
|
|
1,103 |
|
|
|
$ |
3,763 |
|
|
$ |
7,347 |
|
|
$ |
5,514 |
|
Deferred expense (benefit): |
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$ |
(565 |
) |
|
$ |
60 |
|
|
$ |
728 |
|
Foreign
|
|
|
147 |
|
|
|
48 |
|
|
|
(349 |
) |
State and local
|
|
|
(668 |
) |
|
|
(58 |
) |
|
|
165 |
|
|
|
|
(1,086 |
) |
|
|
50 |
|
|
|
544 |
|
Income tax expense
|
|
$ |
2,677 |
|
|
$ |
7,397 |
|
|
$ |
6,058 |
|
The reconciliation between income tax expense and the amount computed by applying the statutory federal income tax rate to income before income taxes is:
|
|
2022
|
|
|
2021
|
|
|
2020
|
|
Income taxes at statutory rate
|
|
$ |
2,913 |
|
|
$ |
7,822 |
|
|
$ |
6,562 |
|
State and local income taxes, net of federal tax benefit
|
|
|
282 |
|
|
|
898 |
|
|
|
711 |
|
Tax credits
|
|
|
(627 |
) |
|
|
(1,052 |
) |
|
|
(808 |
) |
Uncertain tax positions
|
|
|
(99 |
) |
|
|
(26 |
) |
|
|
42 |
|
Valuation allowance
|
|
|
(85 |
) |
|
|
(86 |
) |
|
|
- |
|
GILTI/FDII
|
|
|
608 |
|
|
|
238 |
|
|
|
(286 |
) |
Foreign rate differential
|
|
|
(186 |
) |
|
|
(183 |
) |
|
|
(574 |
) |
Other
|
|
|
(129 |
) |
|
|
(214 |
) |
|
|
411 |
|
Income tax expense
|
|
$ |
2,677 |
|
|
$ |
7,397 |
|
|
$ |
6,058 |
|
The Company made income tax payments of $4.5 million, $7.9 million, and $6.2 million in 2022, 2021, and 2020, respectively.
Deferred income tax assets and liabilities consist of:
|
|
2022
|
|
|
2021
|
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Inventories
|
|
$ |
524 |
|
|
$ |
- |
|
Accrued liabilities
|
|
|
3,208 |
|
|
|
1,900 |
|
Postretirement health benefits obligation
|
|
|
5,584 |
|
|
|
6,724 |
|
Pension
|
|
|
1,868 |
|
|
|
1,745 |
|
Lease liabilities
|
|
|
520 |
|
|
|
272 |
|
Capitalized R&D
|
|
|
1,103 |
|
|
|
- |
|
Interest
|
|
|
3,168 |
|
|
|
- |
|
Other
|
|
|
1,399 |
|
|
|
1,531 |
|
Total deferred tax assets
|
|
|
17,374 |
|
|
|
12,172 |
|
Valuation allowance
|
|
|
(462 |
) |
|
|
(481 |
) |
Net deferred tax assets
|
|
|
16,912 |
|
|
|
11,691 |
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
(16,987 |
) |
|
|
(9,817 |
) |
Leases – right of use assets
|
|
|
(536 |
) |
|
|
(269 |
) |
Inventories
|
|
|
- |
|
|
|
(628 |
) |
Total deferred tax liabilities
|
|
|
(17,523 |
) |
|
|
(10,714 |
) |
Net deferred tax assets (liabilities)
|
|
$ |
(611 |
) |
|
$ |
977 |
|
The Company had state tax credit carryforwards of $0.4 million and $0.6 million as of December 31, 2022 and 2021, respectively, which will expire incrementally between 2023 and 2036.
The Company had valuation allowances of $0.5 million at both December 31, 2022 and 2021, against certain of its deferred tax assets. ASC 740, “Income Taxes,” requires that a valuation allowance be recorded against deferred tax assets when it is more likely than not that some or all of a Company’s deferred tax assets will not be realized based on available positive and negative evidence.
Total unrecognized tax benefits were $0.8 million at both December 31, 2022 and 2021. The total amount of unrecognized tax benefits that, if ultimately recognized, would reduce the Company’s annual effective tax rate were $0.6 million and $0.7 million at December 31, 2022 and 2021, respectively.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
|
|
2022
|
|
|
2021
|
|
|
2020
|
|
Balance at beginning of year
|
|
$ |
808 |
|
|
$ |
878 |
|
|
$ |
1,130 |
|
Additions based on tax positions related to the current year
|
|
|
117 |
|
|
|
153 |
|
|
|
177 |
|
Reductions due to lapse of applicable statute of limitations
|
|
|
(171 |
) |
|
|
(96 |
) |
|
|
(139 |
) |
Settlements
|
|
|
- |
|
|
|
(127 |
) |
|
|
(290 |
) |
Balance at end of year
|
|
$ |
754 |
|
|
$ |
808 |
|
|
$ |
878 |
|
The Company is subject to income taxes in the U.S. federal and various state, local and foreign jurisdictions. Income tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for the years before 2017.
The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense for all periods presented. The Company accrued approximately $0.2 million for the payment of interest and penalties at each of December 31, 2022, 2021 and 2020.
Note 10 – Pensions 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.
Additionally, the Company sponsors defined contribution pension plans made available to all domestic and Canadian employees. Total contributions to the plans were $3.0 million for 2022 and $2.3 million for each of 2021 and 2020.
As part of the agreement to purchase the assets of Fill-Rite, the Company was required to establish a defined benefit pension plan for certain Fill-Rite employees (“Fill-Rite Plan”) as of June 1, 2022. No pension or other postretirement benefit plan liabilities existing as of the acquisition date were assumed as part of the transaction. Total contributions to the Fill-Rite Plan were $0.3 million in 2022. The benefit obligation as of December 31, 2022 was $0.2 million. No payments were made under the plan during 2022. The 2022 activity is included in the tables within this footnote.
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. For measurement purposes, and based on maximum benefits as defined by the plan, a 5% annual rate of increase in the per capita cost of covered health care benefits for all retirees was assumed in estimating the projected postretirement benefit obligation at December 31, 2022, which is expected to remain constant going forward. A 5% percent annual rate of increase was assumed in estimating the projected benefit obligation at December 31, 2021 and in calculating 2022 periodic benefit cost.
The Company recognizes the obligations associated with its defined benefit pension plans and defined benefit postretirement health care plan in its Consolidated Financial Statements. The following table presents the plans’ funded status as of the measurement date, December 31, reconciled with amounts recognized in the Company’s Consolidated Balance Sheets:
|
|
Pension Plans
|
|
|
Postretirement Plan
|
|
|
|
2022
|
|
|
2021
|
|
|
2022
|
|
|
2021
|
|
Accumulated benefit obligation at end of year
|
|
$ |
45,756 |
|
|
$ |
67,400 |
|
|
$ |
23,954 |
|
|
$ |
28,934 |
|
Change in projected benefit obligation: |
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$ |
82,000 |
|
|
$ |
86,299 |
|
|
$ |
28,934 |
|
|
$ |
29,848 |
|
Service cost
|
|
|
2,400 |
|
|
|
2,662 |
|
|
|
1,146 |
|
|
|
1,462 |
|
Interest cost
|
|
|
2,326 |
|
|
|
1,729 |
|
|
|
760 |
|
|
|
654 |
|
Settlement
|
|
|
1,656 |
|
|
|
651 |
|
|
|
- |
|
|
|
- |
|
Benefits paid
|
|
|
(17,826 |
) |
|
|
(7,719 |
) |
|
|
(1,781 |
) |
|
|
(1,618 |
) |
Effect of foreign exchange
|
|
|
- |
|
|
|
- |
|
|
|
(28 |
) |
|
|
1 |
|
Actual expenses
|
|
|
(150 |
) |
|
|
(150 |
) |
|
|
- |
|
|
|
- |
|
Actuarial (gain)/ loss
|
|
|
(14,454 |
) |
|
|
(1,472 |
) |
|
|
(5,077 |
) |
|
|
(1,413 |
) |
Benefit obligation at end of year
|
|
$ |
55,952 |
|
|
$ |
82,000 |
|
|
$ |
23,954 |
|
|
$ |
28,934 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan assets at beginning of year
|
|
$ |
72,658 |
|
|
$ |
77,067 |
|
|
$ |
- |
|
|
$ |
- |
|
Actual return on plan assets
|
|
|
(10,332 |
) |
|
|
1,460 |
|
|
|
- |
|
|
|
- |
|
Employer contributions
|
|
|
2,250 |
|
|
|
2,000 |
|
|
|
1,781 |
|
|
|
1,618 |
|
Benefits paid
|
|
|
(17,826 |
) |
|
|
(7,719 |
) |
|
|
(1,781 |
) |
|
|
(1,618 |
) |
Actual expenses
|
|
|
(150 |
) |
|
|
(150 |
) |
|
|
- |
|
|
|
- |
|
Plan assets at end of year
|
|
$ |
46,600 |
|
|
$ |
72,658 |
|
|
$ |
- |
|
|
$ |
- |
|
Funded status at end of year
|
|
$ |
(9,352 |
) |
|
$ |
(9,342 |
) |
|
$ |
(23,954 |
) |
|
$ |
(28,934 |
) |
|
|
Pension Plans
|
|
|
Postretirement Plan
|
|
|
|
2022
|
|
|
2021
|
|
|
2022
|
|
|
2021
|
|
Amounts recognized in the Consolidated Balance Sheets consist of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
(1,541 |
) |
|
$ |
(1,575 |
) |
Noncurrent liabilities
|
|
|
(9,352 |
) |
|
|
(9,342 |
)
|
|
|
(22,413 |
) |
|
|
(27,359 |
) |
Total assets (liabilities)
|
|
$ |
(9,352 |
) |
|
$ |
(9,342 |
)
|
|
$ |
(23,954 |
) |
|
$ |
(28,934 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in Accumulated other |
|
|
|
|
|
|
|
|
|
Net actuarial loss
|
|
$ |
18,290 |
|
|
$ |
26,016 |
|
|
$ |
308 |
|
|
$ |
5,841 |
|
Prior Service Cost
|
|
|
- |
|
|
|
- |
|
|
|
(995 |
) |
|
|
(2,125 |
) |
Deferred tax (benefit) expense
|
|
|
(4,607 |
) |
|
|
(6,446 |
) |
|
|
242 |
|
|
|
(807 |
) |
After tax actuarial loss
|
|
$ |
13,683 |
|
|
$ |
19,570 |
|
|
$ |
(445 |
) |
|
$ |
2,909 |
|
Components of net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2022
|
|
|
2021
|
|
|
2020
|
|
Pension Plans |
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$ |
2,400 |
|
|
$ |
2,662 |
|
|
$ |
2,709 |
|
Interest cost
|
|
|
2,326 |
|
|
|
1,729 |
|
|
|
1,937 |
|
Expected return on plan assets
|
|
|
(2,892 |
) |
|
|
(3,610 |
) |
|
|
(3,900 |
) |
Recognized actuarial loss
|
|
|
1,724 |
|
|
|
1,904 |
|
|
|
2,160 |
|
Settlement loss
|
|
|
6,427 |
|
|
|
2,304 |
|
|
|
4,583 |
|
Net periodic benefit cost
|
|
$ |
9,985 |
|
|
$ |
4,989 |
|
|
$ |
7,489 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other changes in pension plan assets and benefit obligations recognized in other comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
Net (gain) loss
|
|
|
(7,726 |
) |
|
|
(2,879 |
) |
|
|
2,704 |
|
Total expense recognized in net periodic benefit cost and other comprehensive income
|
|
$ |
2,259 |
|
|
$ |
2,110 |
|
|
$ |
10,193 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement Plan |
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$ |
1,146 |
|
|
$ |
1,462 |
|
|
$ |
1,372 |
|
Interest cost
|
|
|
760 |
|
|
|
654 |
|
|
|
778 |
|
Prior service cost recognition
|
|
|
(1,128 |
) |
|
|
(1,130 |
) |
|
|
(1,129 |
) |
Recognized actuarial loss (gain)
|
|
|
368 |
|
|
|
580 |
|
|
|
306 |
|
Net periodic benefit cost (credit)
|
|
$ |
1,146 |
|
|
$ |
1,566 |
|
|
$ |
1,327 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other changes in postretirement plan assets and benefit obligations recognized in other comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss (gain)
|
|
$ |
(4,317 |
) |
|
$ |
(863 |
) |
|
$ |
3,762 |
|
Total expense (benefit) recognized in net periodic benefit cost and other comprehensive income
|
|
$ |
(3,171 |
) |
|
$ |
703 |
|
|
$ |
5,089 |
|
The components of net periodic benefit cost other than the service cost component are included in Other income (expense), net in the Consolidated Statements of Income.
During 2022, 2021, and 2020, the Company recorded a settlement loss relating to retirees that received lump-sum distributions from the GR Plan totaling $6.4 million, $2.3 million and $4.6 million respectively. These charges were the result of lump-sum payments to retirees which exceeded the GR Plan’s actuarial service and interest cost thresholds.
The prior service cost is amortized on a straight-line basis over the average estimated remaining service period of active participants. The unrecognized actuarial gain or loss in excess of the greater of 10% of the benefit obligation or the market value of plan assets is also amortized on a straight-line basis over the average estimated remaining service period of active participants.
|
|
Pension Plans
|
|
|
Postretirement Plan
|
|
|
|
2022
|
|
|
2021
|
|
|
2022
|
|
|
2021
|
|
Weighted-average assumptions used to determine benefit obligations at December 31: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
4.89 |
% |
|
|
2.44 |
% |
|
|
5.16 |
% |
|
|
2.70 |
% |
Rate of compensation increase
|
|
|
3.50 |
% |
|
|
3.50 |
% |
|
|
- |
|
|
|
- |
|
Weighted-average assumptions used to determine net periodic benefit cost for years ended December 31: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
4.43 |
% |
|
|
2.07 |
% |
|
|
2.70 |
% |
|
|
2.25 |
% |
Expected long-term rate of return on plan assets
|
|
|
5.00 |
% |
|
|
5.10 |
% |
|
|
- |
|
|
|
– |
|
Rate of compensation increase
|
|
|
3.50 |
% |
|
|
3.50 |
% |
|
|
- |
|
|
|
– |
|
To enhance the Company’s efforts to mitigate the impact of the defined benefit pension plan on its financial statements, in 2014 the Company moved towards a liability driven investing model to more closely align assets with liabilities based on when the liabilities are expected to come due. Currently, based on 2022 funding levels, equities may comprise between 22% and 42% of the Plan’s market value. Fixed income investments may comprise between 50% and 70% of the GR Plan’s market value. Alternative investments may comprise between 3% and 13% of the Plan’s market value. Cash and cash equivalents (including all senior debt securities with less than one year to maturity) may comprise between 0% and 10% of the GR Plan’s market value.
Financial instruments included in pension plan assets are categorized into a fair value hierarchy of three levels, based on the degree of subjectivity inherent in the valuation methodology. Level 1 assets are based on unadjusted quoted prices in active markets that are accessible to the reporting entity at the measurement date for identical assets. Level 2 assets are valued at inputs other than quoted prices in active markets for identical assets that are observable either directly or indirectly for substantially the full term of the assets. Level 3 assets are valued based on unobservable inputs for the asset (i.e., supported by little or no market activity). These inputs include management’s own assessments about the assumptions that market participants would use in pricing assets (including assumptions about risk). The level in the fair value hierarchy within which the fair value measurement is classified is determined based on the lowest level input that is significant to the fair value measurement in its entirety.
The following tables set forth by asset class the fair value of plan assets for the years ended December 31, 2022 and 2021:
|
|
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
|
|
|
Significant
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Plan Assets
at December
31, 2022
|
|
Equity
|
|
$ |
7,157 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
7,157 |
|
Fixed income
|
|
|
5,052 |
|
|
|
27,045 |
|
|
|
- |
|
|
|
32,097 |
|
Mutual funds
|
|
|
2,406 |
|
|
|
- |
|
|
|
- |
|
|
|
2,406 |
|
Money funds and cash
|
|
|
1,527 |
|
|
|
3,413 |
|
|
|
- |
|
|
|
4,940 |
|
Total fair value of Plan assets
|
|
$ |
16,142 |
|
|
$ |
30,458 |
|
|
$ |
- |
|
|
$ |
46,600 |
|
|
|
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
|
|
|
Significant
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Plan Assets
at December
31, 2021
|
|
Equity
|
|
$ |
10,979 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
10,979 |
|
Fixed income
|
|
|
8,788 |
|
|
|
42,154 |
|
|
|
139 |
|
|
|
51,081 |
|
Mutual funds
|
|
|
3,045 |
|
|
|
- |
|
|
|
- |
|
|
|
3,045 |
|
Money funds and cash
|
|
|
2,220 |
|
|
|
5,333 |
|
|
|
- |
|
|
|
7,553 |
|
Total fair value of Plan assets
|
|
$ |
25,032 |
|
|
$ |
47,487 |
|
|
$ |
139 |
|
|
$ |
72,658 |
|
Contributions
The Company expects to contribute up to $2.3 million to its defined benefit pension plans in 2023.
Expected future benefit payments
The following benefit payments are expected to be paid as follows based on actuarial calculations:
|
|
2023
|
|
|
2024
|
|
|
2025
|
|
|
2026
|
|
|
2027
|
|
|
Thereafter
|
|
Pension
|
|
$ |
7,435 |
|
|
$ |
2,930 |
|
|
$ |
3,272 |
|
|
$ |
2,871 |
|
|
$ |
3,838 |
|
|
$ |
25,710 |
|
Postretirement
|
|
|
1,580 |
|
|
|
1,591 |
|
|
|
1,632 |
|
|
|
1,673 |
|
|
|
1,750 |
|
|
|
10,356 |
|
For measurement purposes, and based on maximum benefits as defined by the plan, a 5% annual rate of increase in the per capita cost of covered health care benefits for all retirees was assumed as of December 31, 2022 and 2021 and is expected to remain constant going forward.
A one percentage point change in the assumed rate of return on the defined benefit pension plans assets is estimated to have an approximate $0.6 million effect on net periodic benefit cost. Additionally, a one percentage point increase in the discount rate is estimated to have a $1.7 million decrease in net periodic benefit cost, while a one percentage point decrease in the discount rate is estimated to have a $2.0million increase in net periodic benefit cost.
Note 11 – Goodwill and Other Intangible Assets
Changes in the carrying value of goodwill and other intangible asset during 2022:
Historical Cost of Intangible Assets
|
|
December 31,
2021
|
|
|
Acquisitions
|
|
|
Foreign
Currency
|
|
|
December 31,
2022
|
|
Customer relationships
|
|
$ |
7,769 |
|
|
$ |
200,900 |
|
|
$ |
(76 |
) |
|
$ |
208,593 |
|
Technology and drawings
|
|
|
6,750 |
|
|
|
39,800 |
|
|
|
(7 |
) |
|
|
46,543 |
|
Other intangibles
|
|
|
1,997 |
|
|
|
- |
|
|
|
- |
|
|
|
1,997 |
|
Total finite-lived intangible assets
|
|
|
16,516 |
|
|
|
240,700 |
|
|
|
(83 |
) |
|
|
257,133 |
|
Trade names
|
|
|
2,528 |
|
|
|
10,700 |
|
|
|
(2 |
) |
|
|
13,226 |
|
Goodwill
|
|
|
27,243 |
|
|
|
230,688 |
|
|
|
(207 |
) |
|
|
257,724 |
|
Total
|
|
$ |
46,287 |
|
|
$ |
482,088 |
|
|
$ |
(292 |
) |
|
$ |
528,083 |
|
The major components of Goodwill and other intangible assets are:
|
|
2022
|
|
|
2021
|
|
|
|
Historical
Cost
|
|
|
Accumulated
Amortization
|
|
|
Historical
Cost
|
|
|
Accumulated
Amortization
|
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$ |
208,593 |
|
|
$ |
13,369 |
|
|
$ |
7,769 |
|
|
$ |
7,255 |
|
Technology and drawings
|
|
|
46,543 |
|
|
|
5,757 |
|
|
|
6,750 |
|
|
|
4,305 |
|
Other intangibles
|
|
|
1,997 |
|
|
|
1,872 |
|
|
|
1,997 |
|
|
|
1,641 |
|
Total finite-lived intangible assets
|
|
|
257,133 |
|
|
|
20,998 |
|
|
|
16,516 |
|
|
|
13,201 |
|
Trade names and trademarks
|
|
|
13,226 |
|
|
|
- |
|
|
|
2,528 |
|
|
|
- |
|
Goodwill
|
|
|
257,724 |
|
|
|
- |
|
|
|
27,243 |
|
|
|
- |
|
Total
|
|
$ |
528,083 |
|
|
$ |
20,998 |
|
|
$ |
46,287 |
|
|
$ |
13,201 |
|
Amortization of intangible assets was $7.6 million, $0.8 million and $1.3 million in 2022, 2021 and 2020, respectively. The following table summarizes the future estimated amortization expense relating to our intangible assets as of December 31, 2022 (in thousands):
2023
|
|
|
2024
|
|
|
2025
|
|
|
2026
|
|
|
2027
|
|
|
Thereafter
|
|
|
Total
|
|
$ |
12,527 |
|
|
$ |
12,402 |
|
|
$ |
12,367 |
|
|
$ |
12,318 |
|
|
$ |
12,281 |
|
|
$ |
174,240 |
|
|
$ |
236,135 |
|
For 2022, the Company used a quantitative analysis for the annual goodwill impairment testing as of October 1 for its National Pump Company (“National”) reporting unit. The fair value for this reporting unit was estimated using both a discounted cash flow model and a market-based approach. The discounted cash flow model considered forecasted cash flows discounted at an estimated weighted-average cost of capital. The forecasted cash flows were based on the Company’s long-term operating plan and a terminal value was used to estimate the cash flows beyond the period covered by the operating plan. The weighted-average cost of capital is an estimate of the overall after-tax rate of return required by equity and debt market holders of a business enterprise. The market-based approach considers market prices of corporations engaged in the same or similar line of business. These analyses require the exercise of significant judgments, including judgments about appropriate discount rates, perpetual growth rates and the timing of expected future cash flows. Sensitivity analyses were performed around these assumptions in order to assess the reasonableness of the assumptions and the resulting estimated fair values.
The result of this goodwill impairment test indicated that no impairment existed at National. The Company’s annual impairment analysis performed as of October 1, 2022 concluded that National’s fair value exceeded its carrying value. A sensitivity analysis was performed for the National reporting unit, assuming a hypothetical 100 basis point decrease in the expected long-term growth rate or a hypothetical 100 basis point increase in the weighted average cost of capital, and both scenarios independently yielded an estimated fair value for the National reporting unit above carrying value. If National fails to experience growth or revises its long-term projections downward, it could be subject to impairment charges in the future. Goodwill relating to the National reporting unit is $13.6 million, 1.6% of the Company’s December 31, 2022 total assets.
For 2022, for all other reporting units, the Company used a qualitative analysis for goodwill impairment testing as of October 1. This qualitative assessment included consideration of current industry and market conditions and circumstances as well as any mitigating factors that would most affect the fair value of the Company and these reporting units. Based on the assessment and consideration of the totality of the facts and circumstances, including the business environment in the fourth quarter of 2022, the Company determined that it was not more likely than not that the fair value of the Company or these reporting units is less than their respective carrying amounts. As such, no goodwill impairments for these reporting units were recorded for the year ended December 31, 2022.
Other indefinite-lived intangible assets primarily consist of trademarks and trade names. The fair value of these assets is also tested annually for impairment as of October 1, or whenever events or changes in circumstances indicate there may be a possible permanent loss of value. The fair value of these assets is determined using a royalty relief methodology similar to that employed when the associated assets were acquired, but using updated estimates of future sales, cash flows and profitability. For 2022 and 2021 the fair value of all indefinite lived intangible assets exceeded the respective carrying values.
Finite-lived assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount may not be recovered through future net cash flows generated by the assets. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to future net undiscounted cash flows estimated to be generated by such assets. Based upon our fiscal 2022 and 2021 quantitative and qualitative impairment analyses the Company was not aware of any events or changes in circumstances that indicate the carrying value of its finite-lived intangible assets may not be recoverable.
Note 12 – Business Segment Information
The Company operates in one business segment comprising the design, manufacture and sale of pumps and pump systems. The Company’s products are used in water, wastewater, construction, industrial, petroleum, original equipment, agriculture, fire suppression, heating, ventilation and air conditioning (HVAC), military and other liquid-handling applications.
The pumps and pump systems are marketed in the United States and worldwide through a broad network of distributors, through manufacturers’ representatives (for sales to many original equipment manufacturers), through third-party distributor catalogs, and by direct sales. International sales are made primarily through foreign distributors and representatives.
The Company sells to approximately 130 countries around the world. The following tables disaggregate total net sales by major product category and geographic location:
|
|
Product Category
|
|
|
|
2022
|
|
|
2021
|
|
|
2020
|
|
Pumps and pump systems
|
|
$ |
458,890 |
|
|
$ |
321,263 |
|
|
$ |
300,906 |
|
Repair parts for pumps and pump systems and other
|
|
|
62,137 |
|
|
|
57,053 |
|
|
|
48,061 |
|
Total net sales
|
|
$ |
521,027 |
|
|
$ |
378,316 |
|
|
$ |
348,967 |
|
|
|
Geographic Location
|
|
|
|
2022
|
|
|
2021
|
|
|
2020
|
|
United States
|
|
$ |
381,306 |
|
|
$ |
260,683 |
|
|
$ |
246,913 |
|
Foreign countries
|
|
|
139,721 |
|
|
|
117,633 |
|
|
|
102,054 |
|
Total net sales
|
|
$ |
521,027 |
|
|
$ |
378,316 |
|
|
$ |
348,967 |
|
As of the years ending December 31, 2022 and 2021, 97.2% and 86.0%, respectively, of the Company’s long-lived assets were located in the United States.
Note 13 – Common Share Repurchases
During the years ended December 31, 2022 and December 31, 2021, the Company repurchased 24,546 and 30,038 shares for $0.9 million and $1.2 million, respectively. As of December 31, 2022, the Company had $48.1 million available for repurchase under the share repurchase program.