Net sales for the third quarter of 2023 were $167.5 million compared to net sales of $153.8 million for the third quarter of 2022, an increase of 8.9% or $13.7 million. The increase in sales was due to an increase in volume as well as the impact of pricing increases taken in 2022 and an annual price increase in January 2023. Domestic sales increased 10.1% or $11.7 million and international sales increased 5.2% or $2.0 million compared to the same period in 2022.
Sales increased $4.2 million in the fire suppression market primarily from increased domestic commercial construction, $3.5 million in the construction market due to overall strong conditions including infrastructure related projects, $2.7 million in the industrial market and $2.4 million in the repair market due to strengthening in the broader industrial economy, $2.0 million in the OEM market, and $1.0 million in the petroleum market due to increased demand for larger petroleum transfer pumps. Partially offsetting these increases was a sales decrease of $1.8 million in the municipal market due to the timing of domestic flood control and wastewater projects, and a decrease of $0.3 million in the agriculture market primarily driven by weather conditions that have slowed demand.
Gross profit was $48.1 million for the third quarter of 2023, resulting in gross margin of 28.7%, compared to gross profit of $40.6 million and gross margin of 26.4% for the same period in 2022. The 230 basis point increase in gross margin included a 320 basis point improvement in cost of material, which consisted of a reduction in LIFO2 expense of 130 basis points, a favorable impact of 40 basis points related to the amortization of acquired Fill-Rite customer backlog which occurred in the third quarter of 2022 and did not reoccur in the third quarter of 2023, and a 150 basis point improvement from the realization of selling price increases. The increase in gross margin was partially offset by a 90 basis point increase in labor and overhead expenses, which included approximately 60 basis points of one-time expenses related to the relocation and expansion of Fill-Rite’s manufacturing facility in Lenexa, Kansas.
Selling, general and administrative (“SG&A”) expenses were $23.2 million and 13.9% of net sales for the third quarter of 2023 compared to $22.1 million and 14.4% of net sales for the same period in 2022. The increase in SG&A expenses was due to increased expenses to support sales growth. The improvement in SG&A as a percent of sales was primarily due to favorable leverage from increased sales.
Amortization expense was $3.0 million for the third quarter of 2023 compared to $3.2 million for the same period in 2022.
Operating income was $21.9 million for the third quarter of 2023, resulting in an operating margin of 13.1%, compared to operating income of $15.3 million and operating margin of 10.0% for the same period in 2022. Operating margin in the third quarter of 2023 increased 310 basis points compared to the same period in 2022 due to improved margin on material costs, and improved leverage on SG&A and amortization expenses due to increased sales volumes.
Interest expense was $10.5 million for the third quarter of 2023 compared to $7.6 million for the same period in 2022 due to increased interest rates.
Other income (expense), net was $0.4 million of expense for the third quarter of 2023 compared to expense of $5.3 million of expense for the same period in 2022. The $5.3 million expense for the third quarter of 2022 included non-cash pension settlement charges of $4.8 million. The pension settlement charge resulted from retirees electing to receive the lump sum payments upon retirement.
Net income was $9.0 million, or $0.34 per share, for the third quarter of 2023 compared to net income of $2.2 million, or $0.09 per share, in the third quarter of 2022. Adjusted earnings per share1 for the third quarter of 2022 were $0.25 per share. Adjusted earnings per share1 for the third quarter of 2023 included an unfavorable LIFO2 impact of $0.06 per share compared to an unfavorable LIFO2 impact of $0.11 per share in the third quarter of 2022.
Adjusted EBITDA1 was $30.5 million for the third quarter of 2023 compared to $26.3 million for the third quarter of 2022. Adjusted EBITDA1 increased primarily from sales growth and improved gross margin.
Year to date 2023 Highlights
As previously announced, on May 31, 2022, the Company completed its acquisition of Fill-Rite and Sotera (“Fill-Rite”), a division of Tuthill Corporation.
Net sales for the first nine months of 2023 of $498.9 million increased 33.0% or $123.9 million compared to net sales of $375.0 million for the same period in 2022. The increase in sales was due to the inclusion of a full nine months of Fill-Rite sales compared to four months of sales included in the prior year as well as an increase in volume and the impact of pricing increases taken in 2022 and an annual price increase in January 2023. Domestic sales increased 37.5% or $102.2 million and international sales increased 21.3% or $21.7 million compared to the same period in 2022.
Sales increased $31.4 million in the industrial market primarily due to the inclusion of a full nine months of Fill-Rite sales compared to four months of sales included in the same period of the prior year. In addition to the increase from Fill-Rite, industrial sales increased $10.0 million due to the strengthening in the broader industrial economy. Sales increased $27.7 million in the agriculture market due entirely to the inclusion of a full nine months of Fill-Rite sales compared to four months of sales in the prior year period. Sales increased $24.1 million in the construction market primarily due to the inclusion of a full nine months of Fill-Rite sales compared to four months of sales included in the prior year period. In addition to the increase from Fill-Rite, construction sales increased $7.2 million due to overall strong conditions including infrastructure related projects. Sales increased $21.0 million in the fire market primarily from increased domestic commercial construction, $8.4 million in the repair market due to strengthening in the broader industrial economy, $3.9 million in the municipal market due to domestic flood control and wastewater projects related to increased infrastructure investment, and $2.4 million in the OEM market. Sales in the petroleum market increased $4.9 million primarily due to the inclusion of a full nine months of Fill-Rite sales compared to four months of sales included in the prior year period as well as increased demand for larger petroleum transfer pumps.
Gross profit was $145.3 million for the first nine months of 2023, resulting in gross margin of 29.1%, compared to gross profit of $94.3 million and gross margin of 25.1% for the same period in 2022. The 400 basis point increase in gross margin included a 300 basis point improvement in cost of material, which consisted of a favorable LIFO2 impact of 130 basis points, a favorable impact of 30 basis points related to the Fill-Rite inventory step-up that was recognized in 2022 that did not recur in 2023 and a 140 basis point improvement from the realization of selling price increases. The increase in gross margin also included a 100 basis point improvement on labor and overhead leverage due to increased sales volume and sales mix which includes nine months of Fill-Rite sales for 2023 compared to four months for the same period in 2022.
Selling, general and administrative (“SG&A”) expenses were $70.7 million and 14.2% of net sales for the first nine months of 2023 compared to $62.1 million and 16.6% of net sales for the same period in 2022. SG&A expenses for the first nine months of 2022 included $7.0 million of one-time acquisition costs. Excluding acquisition costs of $7.0 million, SG&A expenses were $55.1 million and 14.7% of net sales for the first nine months of 2022. The increase in SG&A expenses, excluding acquisition costs, was due to the inclusion of Fill-Rite expenses for the full nine month period in 2023 as compared to four months in the same period in 2022, as well as increased expenses to support sales growth. The improvement in SG&A as a percent of sales was primarily due to favorable leverage from increased sales.
Amortization expense was $9.4 million for the first nine months of 2023 compared to $4.5 million for the same period in 2022. The increase in amortization expense was due to the inclusion of nine months of amortization attributable to the Fill-Rite acquisition compared to four months for the same period in 2022.
Operating income was $65.3 million for the first nine months of 2023, resulting in an operating margin of 13.1%, compared to operating income of $27.7 million and operating margin of 7.4% for the same period in 2022. Operating income for the first nine months of 2022 included $7.0 million of one-time acquisition costs, and $1.4 million of inventory step-up amortization. Excluding acquisition costs and inventory step-up totaling $8.4 million, operating income was $36.1 million for the first nine months of 2022 resulting in an operating margin of 9.6% of net sales. Excluding acquisition costs and inventory step-up in 2022, operating margin in the first nine months of 2023 increased 350 basis points compared to the same period in 2022 due to improved margin on material costs, and improved leverage on SG&A expense due to increased sales volumes partially offset by increased amortization expense.
Interest expense was $31.1 million for the first nine months of 2023 compared to $9.9 million for the same period in 2022. The increase in interest expense was primarily due to the inclusion of nine months of interest expense in 2023 compared to four months for the first nine months of 2022 on the debt financing attributable to the Fill-Rite acquisition, as well as increased interest rates in 2023 as compared to 2022.
Other income (expense), net was $1.4 million of expense for the first nine months of 2023 compared to expense of $7.1 million of expense for the same period in 2022. The $7.1 million expense for the first nine months of 2022 included non-cash pension settlement charges of $6.4 million.
Net income was $26.0 million, or $0.99 per share, for the first nine months of 2023 compared to net income of $8.8 million, or $0.34 per share, for the first nine months of 2022. Adjusted earnings per share1 for the first nine months of 2023 were $1.02 per share compared to $0.81 per share for the first nine months of 2022. Adjusted earnings per share1 for the first nine months of 2023 included an unfavorable LIFO2 impact of $0.19 per share compared to an unfavorable LIFO2 impact of $0.30 per share in the first nine months of 2022.
Adjusted EBITDA1 was $92.6 million for the first nine months of 2023 compared to $60.2 million for the first nine months of 2022. Adjusted EBITDA1 increased from organic sales growth and improved gross margin as well as the inclusion of Fill-Rite results for the full nine months of 2023 compared to four months in the same period in 2022.
The Company’s backlog of orders was $237.5 million at September 30, 2023 compared to $266.7 million at September 30, 2022 and $267.4 million at December 31, 2022. Incoming orders for the first nine months of 2023 were $476.7 million, or an increase of 6.9% compared to the same period in 2022.
Net cash provided by operating activities for the first nine months of 2023 was $71.7 million compared to $12.5 million for the same period in 2022 driven by increased earnings before depreciation, amortization, and LIFO2 expense, and improved cash flow from working capital management. Capital expenditures for the first nine months of 2023 were $16.9 million and consisted primarily of machinery and equipment. Capital expenditures for the full-year 2023 are presently planned to be approximately $20 million. During the first nine months of 2023, total debt was reduced by $28.1 million and cash increased $11.4 million.
Scott A. King, President and CEO commented, “We continued to see strong sales across the majority of our markets which, along with improved gross margins and SG&A leverage, resulted in an increase in Adjusted EBITDA of 16% over the third quarter of last year. Although down from the record levels we saw earlier in the year, our backlog remains strong and at elevated levels. As expected, we saw our inventories decrease from their second quarter peak which contributed to an improvement in debt, net of cash, of over $25 million during the third quarter. I am pleased that during the quarter we completed the planned relocation and expansion of Fill-Rite’s manufacturing facility in Lenexa, Kansas. This expansion nearly tripled the size of the prior facility and provides additional capacity for Fill-Rite’s continued growth. We remain optimistic about our outlook and will continue to focus on delivering long-term sustained growth and shareholder value.”
Source: The Gorman-Rupp Company
