NOTE 3 – REVENUE

Disaggregation of Revenue

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

International sales represented approximately 29%31% of total net sales for both the thirdsecond quarter of 20202021 and approximately 30% of total net sales for the third quarter in 2019,2020 and were made to customers in many different countries around the world.

Performance Obligations

A performance obligation is a promise in a contract to transfer a distinct good or service to a customer, and is the unit of account in ASC Topic 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’s method for recognizing revenue over time is the percentage of completion method, whereby progress towards completion is measured by applying an input measure based on costs incurred to date relative to total estimated costs at completion.

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.

On SeptemberJune 30, 2020,2021, the Company had $102.0$153.0 million of remaining performance obligations, also referred to as backlog. The Company expects to recognize as revenue substantially all of theits remaining performance obligations within one year.

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) in 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 in 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.

The Company’s contract assets and liabilities as of SeptemberJune 30, 20202021 and December 31, 20192020 were as follows:

Revenue recognized for the ninesix months ended SeptemberJune 30, 20202021 and 20192020 that was included in the contract liabilities balance at the beginning of the period was $4.4$4.3 million for both periods.and $3.8 million, respectively.

NOTE 4 - INVENTORIES

LIFO inventories are stated at the lower of cost or market and all other inventories are stated at the lower of cost or net realizable value. Replacement cost approximates current cost and the excess over LIFO cost is approximately $63.8$64.7 million and $62.5$63.5 million at SeptemberJune 30, 20202021 and December 31, 2019,2020, respectively. Allowances for excess and obsolete inventory totaled $6.1 million and $5.9 million at SeptemberJune 30, 20202021 and at December 31, 2019.2020. An actual valuation of inventory under the LIFO method is made at the end of each year based on the inventory levels and costs at that time. Interim LIFO calculations are based on management’s estimate of expected year-end inventory levels and costs, and are subject to the final year-end LIFO inventory valuation.

Inventories are comprised of the following:

NOTE 5 – PROPERTY, PLANT AND EQUIPMENT

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

NOTE 6 - PRODUCT WARRANTIES

A liability is established for estimated future warranty and service claims based on historical claims experience and specific product failures. The Company expenses warranty costs directly to Cost of products sold. Changes in the Company’s product warranties liability are:

NOTE 7 - PENSION AND OTHER POSTRETIREMENT BENEFITS

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

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

The Company also sponsors a non-contributory defined benefit postretirement health care plan that provides health benefits to certain domestic and Canadian retirees and eligible spouses and dependent children. The Company funds the cost of these benefits as incurred.

The following tables present the components of net periodic benefit costs:

During the threesecond quarter and ninesix month periodsmonths ended SeptemberJune 30, 2020,2021, the Company recorded a settlement loss relating to retirees that received lump-sum distributions from the Company’s defined benefit pension plan totaling $1.0$1.7 million. The Company recorded settlement losses of $1.9 million and $4.4$3.4 million for the second quarter and six months ended June 30, 2020, respectively. This charge wasThese charges were the result of lump-sum payments to retirees which exceededexceeding the Plan’s actuarial service and interest cost thresholds.

NOTE 8 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

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

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

(Dollars in thousands, except for per share amounts)

The following discussion and analysis of the Company’s financial condition and Results of Operations should be read in conjunction with the Consolidated Financial Statements, and notes thereto, and the other financial data included elsewhere in this Quarterly Report on Form 10-Q. The following discussion should also be read in conjunction with the Company’s audited Consolidated Financial Statements and accompanying notes, and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in its Annual Report on Form 10-K for the year ended December 31, 2019.2020. The coronavirus (COVID-19) pandemic has had an adverse effect on the Company’s reported results. This, together with the overall economic downturn that has resulted from the pandemic, slowed demand in the third quarter compared to the prior year third quarter, however demand stabilized compared the second quarter of 2020. Reduced demand when compared to the prior year will likely continue into the fourth quarter of 2020. Ourresults, although our facilities and supply chain have remained operational through the pandemic. The extent to which the Company’s operations will continue to be impacted by the pandemic will depend largely on future developments, which are highly uncertain and cannot be accurately predicted, including new information which may emerge concerning the severity of the pandemic and actions by government authorities to contain the pandemic or treat its impact, among other things.

Executive Overview

The following discussion of Results of Operations includes certain non-GAAP financial data and measures such as adjusted earnings before interest, taxes, depreciation and amortization and adjusted earnings per share amounts which exclude non-cash pension settlement charges in 2021 and 2020. Management utilizes these adjusted financial data and measures to assess comparative operations against those of prior periods without the distortion of non-comparable factors. The Gorman-Rupp Company believes that these non-GAAP financial data and measures also will be useful to investors in assessing the strength of the Company’s underlying operations from period to period. Provided below is a reconciliation of adjusted earnings per share amounts and adjusted earnings before interest, taxes, depreciation and amortization.

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

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

We regularly invest in training for our employees, in new product development and in modern manufacturing equipment, technology and facilities all designed to increase production efficiency and capacity and drive growth by delivering innovative solutions to our customers. We believe that the diversity of our markets is a major contributor to the generally stable financial growth we have produced for more than 85 years.

The Company places a strong emphasis on cash flow generation and maintaining excellent liquidity and financial flexibility. This focus has afforded us the ability to reinvest our cash resources and preserve a strong balance sheet toand position us to weather the COVID-19 pandemic and for future acquisition and product development opportunities. The Company had no bank debt as of SeptemberJune 30, 2020.2021. The Company’s cash position increased $13.1$16.1 million during the first ninesix months of 20202021 to $93.7$124.3 million at SeptemberJune 30, 20202021 and the Company generated $37.0$26.0 million in adjusted earnings before interest, taxes, depreciation and amortization during the same period.

Capital expenditures for the first ninesix months of 20202021 were $6.3$3.5 million and consisted primarily of machinery and equipment and building improvements. Capital expenditures for the full-year 20202021 are presently planned to be in the range of $8-$12-$1015 million primarily for building improvements and machinery and equipment purchases, and are expected to be financed through internally-generated funds.

Net sales for the thirdsecond quarter of 20202021 were $89.0$93.0 million compared to net sales of $99.3$85.8 million for the thirdsecond quarter of 2019, a decrease2020, an increase of 10.4%8.4% or $10.3$7.2 million. Domestic sales decreased 8.9%increased 8.1% or $6.2$4.8 million and international sales decreased 13.8%increased 9.1% or $4.1$2.4 million compared to the same period in 2019. Sales2020. As the global economy has started to recover from the COVID-19 pandemic, sales and incoming orders have decreasedincreased across nearly all of our markets primarily as a result of the COVID-19 pandemic, along with a slowdown in the oil and gas industry. However, net sales increased by 3.7% compared to the second quarter of 2020.markets.

Gross profit was $23.0$24.7 million for the thirdsecond quarter of 2020,2021, resulting in gross margin of 25.8%26.5%, compared to gross profit of $25.8$21.8 million and gross margin of 26.0%25.5% for the same period in 2019.2020. Gross margin decreased 20improved 100 basis points due to a 120 basis point favorable LIFO impact in the prior year third quarter which did not recur in the current year.  Gross profit margin compared to the prior year was negatively impacted from the loss ofimproved leverage on fixed labor and overhead resulting from lowerincreased sales volume compared to 2019 which was partially offset by favorable product mix.volume.

Selling, general and administrative (“SG&A”) expenses were $13.2$14.1 million and 14.9%15.1% of net sales for the thirdsecond quarter of 20202021 compared to $14.1$12.9 million and 14.3%15.0% of net sales for the same period in 2019.2020. SG&A expenses decreased 6.5%increased 9.4% or $0.9$1.2 million due to reduced payroll related and travel expenses combined with overall expense management.  SG&A expensesincreased 10 basis points as a percentage of sales increased 60sales. The increase in SG&A expenses is the result of compensation, travel and other expense items returning closer to pre-pandemic levels as operational activities begin to return to normal.

Operating income was $10.6 million for the second quarter of 2021, resulting in an operating margin of 11.4%, compared to operating income of $9.0 million and operating margin of 10.5% for the same period in 2020. Operating margin improved 90 basis points primarily as a result of loss ofimproved leverage on fixed labor and overhead resulting from lower sales volume.

Operating income was $9.7 million for the third quarter of 2020, resulting in an operating margin of 10.9%, compared to operating income of $11.6 million and operating margin of 11.7% for the same period in 2019. Operating margin decreased 80 basis points primarily as a result of loss of leverage from lowerincreased sales volume.

Other income (expense), net was $0.7$1.7 million of expense for the thirdsecond quarter of 20202021 compared to incomeexpense of $0.3$1.9 million for the same period in 2019.2020. The increasedecrease to expense was due primarily to a decrease in non-cash pension settlement charge of $1.0charges from $1.9 million which occurred in the thirdsecond quarter of 2020.2020 to $1.7 million in the second quarter of 2021.

Net income was $7.3$7.1 million for the thirdsecond quarter of 20202021 compared to $9.8$5.6 million in the thirdsecond quarter of 2019,2020, and earnings per share were $0.28$0.27 and $0.37$0.22 for the respective periods. Earnings per share for the thirdsecond quarter of 2020 included a non-cash pension settlement charge of $0.03 per share. Earnings$0.05 per share improved over the second quarter of 2020 due to increased salesin 2021 and costs containment efforts.$0.06 per share in 2020.

Net sales for the first ninesix months of 20202021 were $266.5$182.0 million compared to net sales of $304.5$177.5 million for the first ninesix months of 2019, a decrease2020, an increase of 12.5%2.6% or $38.0$4.5 million. Domestic sales decreased 11.2%increased 1.7% or $23.7$2.0 million and international sales decreased 15.5%increased 4.7% or $14.3$2.5 million compared to the same period in 2019. Sales have decreased across most of our markets primarily as a result of the COVID-19 pandemic, along with a slowdown in the oil and gas industry.2020.

Gross profit was $68.3$47.7 million for the first ninesix months of 2020,2021, resulting in gross margin of 25.6%26.2%, compared to gross profit of $77.3$45.3 million and gross margin of 25.4%25.5% for the same period in 2019.2020. Gross margin improved 2070 basis points due principally to lower material costs of 180 basis points as a result of the stabilization of material costs and favorable product mix.  Gross profit margin improvements were partially offset by the loss ofimproved leverage on fixed labor and overhead resulting from lowerincreased sales volume compared to 2019.the first six months of 2020.

SG&A expenses were $41.0$28.1 million and 15.4%15.5% of net sales for the first ninesix months of 20202021 compared to $43.5$27.7 million and 14.3%15.6% of net sales for the same period in 2019.2020. SG&A expenses decreased 5.9%increased 1.5% or $2.5$0.4 million due to reduced payroll related and travel expenses combined with overall expense management. SG&A expensesbut improved 10 basis points as a percentage of sales increased 110sales.