UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the Quarterly Period Ended September 30, 20162017

or

For the transition period from                    to

Commission File Number1-6747

The Gorman-Rupp Company

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code(419) 755-1011

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x☒    No  ¨☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x☒    No  ¨☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨☐     No  x☒

There were 26,091,12326,106,623 shares of common stock, without par value, outstanding at October 28, 2016.

Page 1 of 22 pages27, 2017.

The Gorman-Rupp Company and Subsidiaries

Three and nine months ended September 30, 20162017 and 20152016

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PART I. FINANCIAL INFORMATION

ITEM 1—FINANCIAL STATEMENTS (UNAUDITED)

THE GORMAN-RUPP COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

See notes to condensed consolidated financial statements (unaudited).

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THE GORMAN-RUPP COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

See notes to condensed consolidated financial statements (unaudited).

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THE GORMAN-RUPP COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

See notes to condensed consolidated financial statements (unaudited).

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THE GORMAN-RUPP COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

See notes to condensed consolidated financial statements (unaudited).

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PART I

(Amounts in tables in thousands of dollars)

NOTE A1 - BASIS OF PRESENTATION OF FINANCIAL STATEMENTS

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The consolidated financial statements include the accounts of The Gorman-Rupp Company (the “Company” or “Gorman-Rupp”) and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. In the opinion of management of the Company, all adjustments considered necessary for a fair presentation have been included. Certain amounts for 2015 have been reclassified to conform to the 2016 presentation. Operating results for the three and nine months ended September 30, 20162017 are not necessarily indicative of results that may be expected for the year ending December 31, 2016.2017. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015,2016, from which related information herein has been derived.

NOTE B2 - RECENTLY ISSUED ACCOUNTING STANDARDS

The Company considers the applicability and impact of all Accounting Standard Updates (“ASUs”). ASUs not listed below were assessed and determined either to be either not applicable or are expected to have minimal impact on the Company’s consolidated financial statements.

In March 2017, the FASB issued ASU No. 2017-07, “Compensation – Retirement Benefits (Topic 715) – Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,” which provides additional guidance on the presentation of net periodic pension and postretirement benefit costs in the income statement and on the components eligible for capitalization. The amendments in this ASU require that an employer report the service cost component of the net periodic benefit costs in the same income statement line item as other compensation costs arising from services rendered by employees during the period. The non-service-cost components of net periodic benefit costs are to be presented in the income statement separately from the service cost components and outside a subtotal of income from operations. The ASU also allows for the capitalization of the service cost components, when applicable (i.e., as a cost of internally manufactured inventory or a self-constructed asset). The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017 and early adoption is permitted. The amendments in this ASU are to be applied retrospectively. The adoption of ASU 2017-07 will result in a change within operating income with a corresponding change in other income (expense), net to reflect the impact of presenting all components of net benefit cost, except for service cost, outside of operating income. See Note 6 for the components of the Company’s net benefit costs. The Company does not expect the adoption of ASU-2017-07 to have a material impact on its consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04, “Intangibles – Goodwill and Other (Topic 350) – Simplifying the Test for Goodwill Impairment,” which eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. The ASU is effective for impairment tests performed in fiscal years, and interim periods within those years, beginning after December 15, 2019 and early adoption is permitted. The amendments in this ASU are to be applied on a prospective basis. The Company early adopted this new guidance during the three months ended September 30, 2017. The Company concluded that ASU 2017-04 is preferable to the current guidance due to efficiency, since ASU 2017-04 eliminates the requirement to determine the fair value of individual assets and liabilities of a reporting unit to measure goodwill impairment. The Company believes the adoption of ASU 2017-04 did not change the amount of impairment charges recorded in the third quarter of 2017. See Note 8 – Impairment Charges for additional information on our interim goodwill and other intangible asset impairment tests performed.

In February 2016, the FASB issued ASU 2016-02,“Leases “Leases (Topic 842),” which requires lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by all leases with a term of more than one year. Accounting by lessors will remain similar to existing generally accepted accounting principles.U.S. GAAP. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. The Company currently does not expect the adoption of ASU 2016-02 to have a material impact on its consolidated financial statements.

In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory (Topic 330 ),”which revises the measurement of inventory at the lower of cost or market. Currently, market could be replacement cost, net realizable value, or net realizable value less an approximate normal profit margin. In accordance with ASU 2015-11, an entity will measure inventory at the lower of cost2018 and net realizable value which is defined as the estimated selling price in the ordinary course of business less reasonably predictable costs of completion, disposal and transportation. The amendment does not apply to inventory that is measured using last-in, first out (LIFO). The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016; however, early adoption is permitted. The Company currently does not expect the adoption of ASU 2015-11 to2016-02 will have a material impact on its consolidated financial statements.statements as its future minimum lease commitments are not material.

In May 2014, the FASB issued ASU 2014-09, “Revenue“Revenue from Contracts with Customers (Topic 606),” which supersedes most current revenue recognition guidance, including industry-specific guidance, and requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. Subsequent accounting standards updates have been issued, which amend and/or clarify the application of ASU 2014-09. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016; however, in July 2015, the FASB approved a one-year deferral of this standard, with a new effective date for fiscal years beginning after December 15, 2017. The Company is still finalizing its assessment of this ASU, but it does not currently evaluating theexpect it to have a material impact the adoption of ASU 2014-09 will have on its consolidated financial statementsstatements. Based on the evaluation of its current revenue streams and related disclosures.contracts, most will be recorded consistently under both the current and new standard. The Company has not yet selected adetermined it will use the modified retrospective method as its transition method nor has it determinedin the effectadoption of the standard onnew revenue standard. The Company will continue to accumulate information that will be necessary for implementation and to identify and implement any changes needed to processes and controls to meet the ASU’s updated reporting and disclosure requirements. The Company will continue its ongoing financial reporting.evaluation of this new guidance through the date of adoption.

NOTE C3 - INVENTORIES

Inventories are stated at the lower of cost or market. The costs for approximately 71%72% of inventories at September 30, 20162017 and 73% of inventories at December 31, 20152016 are determined using the last-in, first-out (LIFO)(“LIFO”) method, with the remainder determined using the first-in, first-out (FIFO) method applied on a consistent basis. Replacement cost approximates current cost and the excess over LIFO cost was approximately $59.7 million and $58.4 million at September 30, 2017 and December 31, 2016, respectively. An actual valuation of inventory under the LIFO method is made at the end of each year based on the inventory levels and costs at that time. Interim LIFO calculations are based on management’s estimate of expected year-end inventory levels and costs and are subject to the final year-end LIFO inventory valuation.

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PART I - CONTINUED

NOTE C - INVENTORIES – CONTINUEDAllowances for excess and obsolete inventory totaled $4.9 million and $4.5 million at September 30, 2017 and December 31, 2016, respectively.

The major components of net inventories are as follows (net of LIFO reserves of $59.3 million and $59.1 million at September 30, 2016 and December 31, 2015, respectively):follows:

NOTE D4 - PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of the following:

NOTE 5 - 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:

NOTE E6 - PENSION AND OTHER POSTRETIREMENT BENEFITS

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

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

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PART I - CONTINUED

NOTE E - PENSION AND OTHER POSTRETIREMENT BENEFITS—CONTINUEDThe 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 following tables present the components of net periodic benefit cost:

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PART I – CONTINUED

NOTE F7 - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following table summarizes reclassifications out of accumulated other comprehensive income (loss):

The following tables summarize changes in balances for each component of accumulated other comprehensive income (loss):

		Currency Translation Adjustments				Pension and Other Postretirement Benefits				Accumulated Other Comprehensive Income (Loss)
Balance at January 1, 2016		$	(9,057	)		$	(13,358	)		$	(22,415	)
Reclassification adjustments			—				1,053				1,053
Current period credit			1,487				—				1,487
Income tax expense			—				(343	)			(343	)
Balance at September 30, 2016		$	(7,570	)		$	(12,648	)		$	(20,218	)

NOTE 8 – IMPAIRMENT CHARGES

The decreasing demand for barge pumps for the marine transportation market, driven by low oil prices and overcapacity of inland barges, has continued to negatively affect the Bayou City Pump Company (“Bayou”) reporting unit, leading management to reconsider its estimates for future profitability of this reporting unit during the third quarter of 2017 and thereby increasing the likelihood that the associated goodwill and other intangible assets could be impaired. As such, the Company performed an interim discounted cash flow analysis to test for potential impairment of goodwill pursuant to ASU 2017-04 and performed a recoverability test related to Bayou’s customer relationship intangible asset. As a result of these impairment tests, the Company concluded that the goodwill and customer relationships were impaired and recorded non-cash impairment charges of $0.9 million and $3.2 million, respectively, which represented the full remaining amounts of both of these intangible assets. These impairment charges are included in Impairment of goodwill and other intangible assets on the Condensed Consolidated Statements of Income.

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PART I – CONTINUED

(Amounts in tables in thousands of dollars)

Executive Overview

The following discussion of Results of Operations includes certain non-GAAP financial data, and measures such as adjusted earnings before interest, taxes, depreciation and amortization and adjusted earnings per share amounts which exclude a 2017 non-cash pension settlement charge and non-cash impairment charges relating to goodwill and other intangible assets. Management utilizes these adjusted financial data and measures to assess comparative operations against those of prior periods without the distortion of non-comparable factors. The Gorman-Rupp Company believes that these non-GAAP financial data and measures will be useful to investors as well as to assess the continuing strength of the Company’s underlying operations from period to period. Provided below is a reconciliation of adjusted earnings per share amounts and adjusted earnings before interest, taxes, depreciation and amortization.

		Three Months Ended September 30,								Nine Months Ended September 30,
		2017				2016				2017				2016
Adjusted earnings per share:
Reported earnings per share – GAAP basis		$	0.22			$	0.27			$	0.71			$	0.76
Plus pension settlement charge			0.01				—				0.10				—
Plus impairment of goodwill and other intangible asset charges			0.10				—				0.10				—
Non-GAAP adjusted earnings per share		$	0.33			$	0.27			$	0.91			$	0.76
Adjusted earnings before interest, taxes, depreciation and amortization:
Reported net income – GAAP basis		$	5,702			$	6,927			$	18,615			$	19,829
Plus income taxes			2,255				3,475				8,469				9,464
Plus depreciation and amortization			3,973				3,827				11,406				11,604
Non-GAAP earnings before interest, taxes, depreciation and amortization			11,930				14,229				38,490				40,897
Plus pension settlement charge			448				—				3,841				—
Plus impairment of goodwill and other intangible asset charges			4,098				—				4,098				—
Non-GAAP adjusted earnings before interest, taxes, depreciation and amortization		$	16,476			$	14,229			$	46,429			$	40,897

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 protection, heating, ventilating and air conditioning (HVAC), military and other liquid-handling applications. The Company attributes its success to long-term product quality, applications and performance combined with timely delivery and service, and continually developsseeks to develop initiatives to improve performance in these key areas.

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

We continuallyregularly invest in training for our employees, in new product development and in modern manufacturing equipment, technology and facilities all designed to increase production efficiency and capacity and drive growth by delivering innovative solutions to our customers. We believe that the diversity of our markets is a major contributor to the generally stable financial growth we have produced over the past 80 plus years.

The Company places a strong emphasis on cash flow generation and having excellent liquidity and financial flexibility. This focus has afforded us the continuing ability to reinvest our cash resources and preserve a strong balance sheet to position us for future acquisition and product development opportunities. The Company had no bank debt as of September 30, 2016.2017.

Net sales during the third quarter of 2017 were $91.3$94.0 million compared to $104.2$91.3 million during the third quarter of 2015, a decrease2016, an increase of 12.4%2.9% or $12.9$2.6 million. Excluding sales from the New Orleans Permanent Canal Closures & Pumps (“PCCP”) project of $1.6$0.3 million in the third quarter of 20162017 and $9.8$1.6 million for the same period in 2015,2016, net sales during the quarter decreased 5.0%.increased 4.4% or $4.0 million. Domestic sales, decreased 19.3%excluding PCCP, increased 3.5% or $13.9$2.0 million while international sales increased 3.3%6.0% or $1.0$2.0 million compared to the same period in 2015. 2016.

Gross profit was $22.7$26.2 million for the third quarter of 2016,2017, resulting in gross margin of 24.8%27.9%, compared to gross profit of $23.3$22.7 million and gross margin of 22.4%24.8% for the same period in 2015. The quarter’s gross profit2016. Gross margin increase was due principally to favorable sales mix changes andincluded a non-cash pension settlement charge of 120$0.3 million or 30 basis points in the third quarter of 20152017 which did not recuroccur in the same period this year, partially offsetthird quarter of 2016. Excluding the non-cash pension settlement charge, the 340 basis point increase in gross margin was largely driven by favorable sales mix and lower leverage due tomanufacturing overhead expenses.

Selling, general and administrative expense (“SG&A”) was $14.2 million and 15.2% of net sales volume decreases. Operating income was $9.9 million, resulting in operating margin of 10.8% for the third quarter of 2016,2017 compared to operating income of $8.9$12.8 million and operating margin14.0% of 8.6%net sales for the same period in 2015. The operating margin improvement was largely driven by2016. SG&A included a non-cash pension settlement charge totaling 180of $0.1 million or 20 basis points in the third quarter of 2015 which did not recur in the same period this year and2017. SG&A included a gain on the sale of property, plant and equipment of $1.0 million or 110 basis points in the third quarter of 20162016. Excluding these items, SG&A as a percentage of 110sales improved 10 basis points offset by lowerdue principally to higher sales volume.

Operating income was $7.9 million, resulting in operating leveragemargin of 8.4% for the third quarter of 2017, compared to operating income of $9.9 million and operating margin of 10.8% for the same period in 2016. In the third quarter of 2017, due to sales volume decreases. Net income was $6.9decreasing demand for barge pumps for the marine transportation market, driven by low oil prices and overcapacity of inland barges, the

Company recorded non-cash impairment charges of $4.1 million duringor 440 basis points related to its Bayou City Pump Company reporting unit. These charges represented the full remaining amounts of the reporting unit’s goodwill and customer relationship intangible assets. The third quarter of 2017 also included a non-cash pension settlement charge of $0.4 million or 50 basis points which did not occur in the same period last year. In the third quarter of 2016, compared to $5.9 million in the third quarter of 2015 and earnings per share were $0.27 and $0.22 for the respective periods. Gainoperating margin included a gain on the sale of property, plant and equipment of $1.0 million or 110 basis points. Excluding these items, operating margin improved 360 basis points due principally to increased sales, favorable sales mix and lower manufacturing overhead expenses.

Net income was $5.7 million during the third quarter of 2017 compared to $6.9 million in the third quarter of 2016, and earnings by $0.03per share were $0.22 and $0.27 for the respective periods. Earnings per share for the third quarter of 2017 included non-cash impairment charges of $0.10 per share and a non-cash pension settlement charge of $0.01 per share. Conversely, the non-cash pension settlement charge in the third quarter of 2015 reduced earnings by $0.052016 included a gain on the sale of property, plant and equipment of $0.03 per share.

Net sales for the nine months ended September 30, 20162017 were $287.9$284.5 million compared to $307.4$287.9 million during the same period in 2015,2016, a decrease of 6.3%1.2% or $19.5$3.4 million. Excluding sales from the PCCP project of $9.5$0.8 million in the first nine months of 20162017 and $30.3$9.5 million for the same period in the first nine months of 2015,2016, net sales for the first nine months of 2017 increased 0.5%.1.9% or $5.3 million. Domestic sales, decreased 8.1%excluding PCCP, increased by 0.1% or $16.7$0.2 million andwhile international sales decreased 2.8%increased 5.2% or $2.8 million. Of$5.1 million compared to the total decreasesame period in net sales in the first nine months of 2016, approximately $0.9 million was due to unfavorable foreign currency translation. 2016.

Gross profit was $68.8$73.5 million for the first nine months of 2016,2017, resulting in gross margin of 23.9%25.9%, compared to gross profit of $71.4$68.8 million and gross margin of 23.2%23.9% for the same period in 2015. The gross profit2016. Gross margin increase was due principally toincluded a non-cash pension settlement charge of 80$2.5 million or 90 basis points in the first nine months of 20152017 which did not recuroccur in the same period this year. Operating incomefirst nine months of 2016. Excluding the non-cash pension settlement charge, gross margin increased by 290 basis points due principally to favorable sales mix, labor efficiency and lower warranty expense.

SG&A was $28.6$43.1 million resulting in operating marginand 15.2% of 9.9%net sales for the first nine months of 2016,2017 compared to operating income of $29.4$40.2 million and operating margin14.0% of 9.6%net sales for the same period in 2015. The operating margin improvement also was largely driven by2016. SG&A included a non-cash pension settlement charge totaling 110of $1.3 million or 50 basis points in the first nine months of 20152017 which did not recuroccur in the same period this year andlast year. SG&A included a gain on the sale of property, plant and equipment of 30$1.0 million or 40 basis points in the first nine months of 2016, offset by2016. Excluding these items, SG&A as a percentage of sales increased 30 basis points due principally to lower operating leverage due to sales volume decreases. Netvolume.

Operating income was $19.8$26.3 million, duringresulting in operating margin of 9.3% for the first nine months of both 20162017, compared to operating income of $28.6 million and 2015 and earnings per share were $0.76 and $0.75operating margin of 9.9% for the respective periods. Gainsame period in 2016. In the first nine months of 2017, operating margin included non-cash impairment charges of $4.1 million or 140 basis points and a non-cash pension settlement charge of $3.8 million or 140 basis points. In the first nine months of 2016, operating margin included a gain on the sale of property, plant and equipment increasedof $1.0 million or 30 basis points. Excluding these items, operating margin improved 250 basis points due principally to favorable sales mix, and lower labor and manufacturing overhead costs.

Net income was $18.6 million during the first nine months of 2017 compared to $19.8 million in the first nine months of 2016, and earnings by $0.03 per share. Conversely,share were $0.71 and $0.76 for the non-cash pension settlement charge reducedrespective periods. Earnings per share for the first nine months of 2015 earnings by $0.092017 included non-cash impairment charges of $0.10 per share and a non-cash pension settlement charge of $0.10 per share.

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Conversely, the first nine months of 2016 included a gain on the sale of property, plant and equipment of $0.03 per share.

The Company’s backlog of orders was $111.4 million at September 30, 2017 compared to $102.8 million at September 30, 2016 compared to $138.8 million at September 30, 2015 and $117.1$98.8 million at December 31, 2015.2016. Excluding the PCCP project in 2015 and 2016, the backlog at September 30, 2016 was down 16.0%2017 increased 9.6% as compared to September 30, 2015. In addition to the impact of PCCP, backlog has been impacted by lower orders in the petroleum and fire protection markets. Encouragingly, the municipal wastewater sector appears to be gaining momentum as incoming orders have increased as compared to the first nine months of 2015. Approximately $1.2 million of orders related to the PCCP project remain in the September 30, 2016 backlog total and are expected to ship by the end of the fourth quarter of 2016.

On October 27, 2016,26, 2017, the Board of Directors ofauthorized the Company declaredpayment of a quarterly cash dividend of $0.115$0.125 per share on the common stock of the Company, payable December 9, 2016,8, 2017, to shareholders of record November 15, 2016.2017. The cash dividend will represent an 8.7% increase over the dividend paid in the previous quarter. This will mark the 267th271st consecutive quarterly dividend paid by The Gorman-Rupp Company and the 44th45th consecutive year of increased dividends paid to its shareholders. These consecutive years place Gorman-Rupp in the top 50 of all U.S. public companies with respect to number of consecutive years of increased dividend payments. The dividend yield at September 30, 20162017 was 1.6%1.4%.

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

Outlook

Domestic and foreign uncertainties, including turmoilinstability related to the production and price of oil foreign currency translation impacts and low commodity prices continued to makehave made 2017 challenging. In addition, with the first nine monthscompletion of 2016 challenging. The fourth quarter of most years has been seasonally slower and the PCCP project, shipmentscomparisons of revenue with 2016 will need to be appropriately adjusted during 2017. Overall business conditions have continued to improve and we are generally complete. As periods of economicoptimistic about our incoming order rate. We are also encouraged to see capital spending increase in industries related to oil and business volatility persist,gas drilling activity and are hopeful the momentum is sustainable. The Company remains focused on operational efficiencies and will continue to manage expenses closely asclosely. Our underlying fundamentals remain strong and we do not yet see stable sales growth occurring in the near future.remain well positioned to drive long-term growth. Our strong balance sheet provides us with the flexibility to continue to evaluate acquisition opportunities and new product development that we expect will help add value to our operations over the longer-term.

Generally we believe that the Company is well positioned to grow organically at a reasonably comparable sales pace and operating margin over the long term by expanding our customer base, both domestically and globally, and through new product offerings. We expect that the increasing need for water and wastewater infrastructure rehabilitation within the United States, and similar needs internationally, including in emerging economies, along with increasing demand for pumps and pump systems for industrial and agricultural applications, will provide continuing growth opportunities for Gorman-Rupp in the future.

Third QuarterThree Months Ended September 30, 2017 vs. Three Months Ended September 30, 2016 Compared to Third Quarter 2015

Net Sales

Net sales during the third quarter of 2017 were $94.0 million compared to $91.3 million during the third quarter of 2016, an increase of 2.9% or $2.6 million. Excluding sales from the New Orleans Permanent Canal Closures & Pumps (“PCCP”) project of $1.6$0.3 million in the third quarter of 20162017 and $9.8$1.6 million for the same period in 2015,2016, net sales during the quarter decreased 5.0%.increased 4.4% or $4.0 million. Domestic sales, decreased 19.3%excluding PCCP, increased 3.5% or $13.9$2.0 million while international sales increased 3.3%6.0% or $1.0$2.0 million compared to the same period in 2015.2016.

Sales in our larger water markets, excluding PCCP, decreased 2.2% or $1.4 million in the third quarter of 2016 in our larger water markets decreased 8.9% or $6.5 million2017 compared to the third quarter of 2015.2016. Sales in the municipal market decreased $5.1 million driven by reduced PCCP project sales noted above, offset in part by increased shipments attributable to other flood control projects and clean water applications. Sales in the agriculture market decreased $1.8 million principally due to wet weather conditions in many locations domestically and lower farm income. However, sales in the construction market increased $2.0$2.6 million due primarily to sales to rental businesses as a resultmarket customers related to increased oil and gas drilling activity. This increase was offset by decreased sales in the municipal market of flooding$2.2 million primarily driven by decreased shipments attributable to flood control projects, clean water and wastewater applications. In addition, sales in several areas domestically and a fleet purchase by a new customer. The remainder of the overall sales decrease was largelyfire protection market decreased $1.8 million due principally to reduced shipments of repair parts.market softness in the Middle East.

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Sales decreased 20.3%increased 21.7% or $6.4$5.4 million in non-water markets during the third quarter of 20162017 compared to the third quarter of 2015.2016. Sales in the industrial market decreased $4.2and petroleum markets increased a combined $3.2 million and sales in the petroleum market decreased $1.4 million, both principally attributable to the continued slowdown inincreased capital spending related to oil and gas production.drilling activity. Sales in the OEM market increased $2.2 million primarily related to power generation equipment and services.

Cost of Products Sold and Gross Profit

The improvement in gross margin in

Gross profit was $26.2 million for the third quarter of 20162017, resulting in gross margin of 27.9%, compared to gross profit of $22.7 million and gross margin of 24.8% for the third quarter of 2015 was principally due to lower cost of material of 290 basis points driven by sales mix changes and a favorable LIFO adjustment. In addition, pension expense was lower because ofsame period in 2016. Gross margin included a non-cash pension settlement charge of 120$0.3 million or 30 basis points in the third quarter of 20152017 which did not recuroccur in the third quarter of 2016. Partially offsetting theseExcluding the non-cash pension settlement charge, the 340 basis point increase in gross margin was largely driven by favorable variances wassales mix and lower leverage because of sales volume decreases.manufacturing overhead expenses.

Selling, General and Administrative Expenses (SG&A)

The increase in SG&A expenses as a percentagewas $14.2 million and 15.2% of net sales for the third quarter of 2017 compared to $12.8 million and 14.0% of net sales for the same period in 2016. SG&A included a non-cash pension settlement charge of $0.1 million or 20 basis points in the third quarter of 2016 compared to the third quarter of 2015 was due principally to loss of leverage due to lower sales volume, increased professional services fees of approximately 50 basis points and increased healthcare costs of approximately 40 basis points. Offsetting these increases was2017. SG&A included a gain on the sale of property, plant and equipment in the third quarter of 2016 of$1.0 million or 110 basis points. There was a pension settlement charge in the third quarter of 2015 of 60 basis points which did not recur in the third quarter of 2016. Excluding these items, SG&A as a percentage of sales improved 10 basis points due principally to higher sales volume.

NetOperating Income

13

PART I – CONTINUED

Operating income was $7.9 million, resulting in operating margin of 8.4% for the third quarter of 2017, compared to operating income of $9.9 million and operating margin of 10.8% for the same period in 2016. In the third quarter of 2017, due to decreasing demand for barge pumps for the marine transportation market, driven by low oil prices and overcapacity of inland barges, the Company recorded non-cash impairment charges of $4.1 million or 440 basis points related to its Bayou City Pump Company reporting unit. These charges represented the full remaining amounts of the reporting unit’s goodwill and customer relationship intangible assets. The increasethird quarter of 2017 also included a non-cash pension settlement charge of $0.4 million or 50 basis points which did not occur in net income inthe same period last year. In the third quarter of 2016, compared to the third quarter of 2015 was due primarily tooperating margin included a gain on the sale of property, plant and equipment of $1.0 million or 110 basis points. Excluding these items, operating margin improved 360 basis points due principally to increased sales, favorable sales mix and lower manufacturing overhead expenses.

Net Income

The decrease in 2016, a favorable LIFO adjustment in 2016 and a pension settlement chargenet income in the third quarter of 2015 which did not recur2017 compared to the third quarter of 2016 was due primarily to increased sales and gross margin offset by non-cash impairment charges in the third quarter of 2016. These favorable variances were offset by lower sales volume.2017 of $2.7 million, net of income taxes, and a non-cash pension settlement charge of $0.3 million, net of income taxes. The decrease in the effective tax rate between the two periods was due primarily to the impact of lower income in domestic jurisdictions with higher tax rates driven by the goodwill and other intangible asset impairment charges.

Earnings per share for the third quarter of 2017 included non-cash impairment charges of $0.10 per share and a research and development tax credit being in effect innon-cash pension settlement charge of $0.01 per share. Conversely, the third quarter of 2016 but not inincluded a gain on the third quartersale of 2015, changes in the estimated domestic production activities deductionproperty, plant and the impactequipment of more income in jurisdictions with lower tax rates.$0.03 per share.

Nine Months 2016 Compared toEnded September 30, 2017 vs. Nine Months 2015Ended September 30, 2016

Net Sales

Net sales for the nine months ended September 30, 2017 were $284.5 million compared to $287.9 million during the same period in 2016, a decrease of 1.2% or $3.4 million. Excluding sales from the PCCP project of $9.5$0.8 million in the first nine months of 20162017 and $30.3$9.5 million for the same period in the first nine months of 2015,2016, net sales for the first nine months of 2017 increased 0.5%.1.9% or $5.3 million. Domestic sales, decreased 8.1%excluding PCCP, increased by 0.1% or $16.7$0.2 million andwhile international sales decreased 2.8%increased 5.2% or $2.8 million. Of$5.1 million compared to the total decreasesame period in net sales in the first nine months of 2016, approximately $0.9 million was due to unfavorable foreign currency translation.2016.

Sales in the first nine months of 20162017 in our larger water markets, excluding PCCP, decreased 6.8%0.3% or $14.9$0.7 million compared to the first nine months of 2015.2016. Sales in the municipalconstruction market decreased $8.8increased $7.2 million driven by reduced PCCP projectdue primarily to sales noted above, offset in part byto rental market customers, and sales of repair parts increased shipments attributable to other flood control projects and clean water and wastewater applications.$1.8 million. Sales decreased $3.1 million in the agriculture market principally due to wet weather conditions in many locations domestically and lower farm income, and sales in the fire protection market decreased $2.2$5.1 million principally due to market softness domestically and in countriesthe Middle East, and sales in the Middle East.agriculture market decreased $1.6 million principally due to low farm income and competitive pricing pressure. Sales in the municipal market decreased $3.0 million principally driven by decreased shipments attributable to flood control projects.

Sales decreased 5.3% or $4.6 million in non-water markets during the first nine months of 20162017 in our non-water markets increased 7.2% or $6.0 million compared to the first nine months of 2015. Increased sales of $2.62016. Sales increased $5.4 million in the industrial market driven by an increase in oil and gas drilling activity. Sales in the OEM market increased $2.6 million primarily related to power generation equipment and services and infrastructure spending driven by gas production. These increases were partially offset by a decreasedecreased shipments of $7.1$2.0 million in the industrialpetroleum market largely attributable to the continued slowdown in oil and gas production.driven by challenging market conditions.

Cost of Products Sold and Gross Profit

The improvementGross profit was $73.5 million for the first nine months of 2017, resulting in gross margin of 25.9%, compared to gross profit of $68.8 million and gross margin of 23.9% for the same period in 2016. Gross margin included a non-cash pension settlement charge of $2.5 million or 90 basis points in the first nine months of 20162017 which did not occur in the first nine months of 2016. Excluding the non-cash pension settlement charge, gross margin increased by 290 basis points due principally to favorable sales mix, labor efficiency and lower warranty expense. Offsetting these benefits was a 25 basis point increase in healthcare expenses.

Selling, General and Administrative Expenses (SG&A)

SG&A was $43.1 million and 15.2% of net sales for the first nine months of 2017 compared to $40.2 million and 14.0% of net sales for the same period in 20152016. SG&A included a non-cash pension settlement charge of $1.3 million or 50 basis points in the first nine months of 2017 which did not occur in the same period last year. SG&A included a gain on the sale of property, plant and equipment of $1.0 million or 40 basis points in the first nine months of 2016. Excluding these items, SG&A as a percentage of sales increased 30 basis points due principally to lower sales volume.

Operating Income

Operating income was driven$26.3 million, resulting in operating margin of 9.3% for the first nine months of 2017, compared to operating income of $28.6 million and operating margin of 9.9% for the same period in 2016. In the first nine months of 2017, operating margin included non-cash impairment charges of $4.1 million or 140 basis points and a non-cash pension settlement charge of $3.8 million or 140 basis points. In the first nine months of 2016, operating margin included a gain on the sale of property, plant and equipment of $1.0 million or 30 basis points. Excluding these items, operating margin improved 250 basis points due principally to favorable sales mix, and lower labor and manufacturing overhead costs.

Net Income