The Gorman-Rupp Company (GRC) 10-K 2005 FY Annual report

EXHIBIT (13)

The Board of Directors and Shareholders
The Gorman-Rupp Company

We have audited the consolidated balance sheets of The Gorman-Rupp Company and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Gorman-Rupp Company and subsidiaries at December 31, 2005 and 2004, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of The Gorman-Rupp Company’s internal control over financial reporting as of December 31, 2005, based on criteria established inInternal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 23, 2006 expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG LLP
Cleveland, Ohio
February 23, 2006

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	Year ended December 31,
(Thousands of dollars, except per share amounts)	2005			2004			2003
Net sales	$	231,249		$	203,554		$	195,826
Cost of products sold		184,178			161,129			153,975
Gross Profit		47,071			42,425			41,851
Selling, general and administrative expenses		30,368			28,999			27,988
Operating Income		16,703			13,426			13,863
Other income		892			1,005			701
Other expense		(457	)		(79	)		(164	)
Income Before Income Taxes		17,138			14,352			14,400
Income taxes		6,235			5,075			4,613
Net Income	$	10,903		$	9,277		$	9,787
Basic and Diluted Earnings Per Share	$	1.02		$	0.87		$	0.92
Average number of shares outstanding		10,684,209			10,680,832			10,677,087

See notes to consolidated financial statements.

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	December 31,
(Thousands of dollars)	2005		2004
Assets
Current Assets:
Cash and cash equivalents	$	6,755	$	16,202
Short-term investments		4,785		2,696
Accounts receivable		41,473		32,988
Inventories:
Raw materials and in-process		29,187		20,348
Finished parts		21,883		16,602
Finished products		1,333		1,284
		52,403		38,234
Deferred income taxes		3,419		5,194
Prepaid and other		1,666		1,660
Total Current Assets		110,501		96,974
Property, Plant and Equipment
Land		1,694		1,959
Buildings		46,094		48,077
Machinery and equipment		88,841		85,624
		136,629		135,660
Less accumulated depreciation		85,124		80,848
Property, Plant and Equipment - Net		51,505		54,812
Other		17,535		13,887
	$	179,541	$	165,673

See notes to consolidated financial statements.

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	December 31,
	2005			2004
Liabilities and Shareholders’ Equity
Current Liabilities:
Accounts payable	$	9,835		$	6,615
Payrolls and related liabilities		3,781			3,412
Commissions payable		5,395			2,809
Accrued expenses		4,759			3,629
Accrued property and sales tax		1,203			1,719
Income taxes		821			571
Accrued postretirement and medical benefits		2,425			2,357
Total Current Liabilities		28,219			21,112
Postretirement Benefits		23,255			22,334
Deferred Income Taxes		1,019			329
Shareholders’ Equity
Common Shares, without par value:
Authorized – 14,000,000 shares;
Outstanding – 10,685,697 shares in 2005 and 10,682,697 shares in 2004 (after deducting treasury shares of 395,278 in 2005 and 398,278 in 2004) at stated capital amount		5,095			5,093
Retained earnings		122,243			117,261
Accumulated other comprehensive loss (translation adjustments)		(290	)		(456	)
Total Shareholders’ Equity		127,048			121,898
	$	179,541		$	165,673

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							Accumulated
							Other
		Common		Retained			Comprehensive
(Thousands of dollars, except per share amounts)		Shares		Earnings			Income (Loss)			Total
Balances January 1, 2003		$	5,089	$	109,765		$	(1,942	)	$	112,912
Comprehensive income:
Net income					9,787						9,787
Foreign currency translation adjustments								956			956
Total comprehensive income											10,743
	��
Issuance of 3,000 common shares from treasury			2		70						72
Cash dividends — $.54 a share					(5,809	)					(5,809	)
Balances December 31, 2003			5,091		113,813			(986	)		117,918
Comprehensive income:
Net income					9,277						9,277
Foreign currency translation adjustments								530			530
Total comprehensive income											9,807
Issuance of 3,000 common shares from treasury			2		78						80
Cash dividends — $.55 a share					(5,907	)					(5,907	)
Balances December 31, 2004			5,093		117,261			(456	)		121,898
Comprehensive income:
Net income					10,903						10,903
Foreign currency translation adjustments								166			166
Total comprehensive income											11,069
Issuance of 3,000 common shares from treasury			2		62						64
Cash dividends — $.56 a share					(5,983	)					(5,983	)
Balances December 31, 2005		$	5,095	$	122,243		$	(290	)	$	127,048

See notes to consolidated financial statements.

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	Year ended December 31,
(Thousands of dollars)	2005			2004			2003
Cash flows from operating activities:
Net income	$	10,903		$	9,277		$	9,787
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		6,808			7,179			7,274
Deferred income taxes		2,465			1,504			(619	)
Changes in operating assets and liabilities:
Accounts receivable		(8,485	)		(840	)		(2,914	)
Inventories		(14,169	)		(172	)		(2,475	)
Accounts payable		3,220			452			(394	)
Commissions payable		2,586			(629	)		1,091
Income taxes		250			(1,971	)		2,074
Postretirement benefits		1,053			287			(556	)
Other		(1,588	)		(589	)		283
Net cash provided by operating activities		3,043			14,498			13,551
Cash flows from investing activities:
Capital additions, net		(3,189	)		(7,500	)		(3,698	)
Purchases of short-term investments		(2,089	)		(1,522	)		(1,174	)
Payment for acquisitions		(1,331	)		—			—
Net cash used for investing activities		(6,609	)		(9,022	)		(4,872	)
Cash flows from financing activities:
Cash dividends		(5,983	)		(5,907	)		(5,809	)
Proceeds from revolving credit facility		1,182			—			—
Payments on revolving credit facility and to note holder		(1,182	)		—			(145	)
Net cash used for financing activities		(5,983	)		(5,907	)		(5,954	)
Effect of exchange rate changes on cash		102			361			461
Net increase (decrease) in cash and cash equivalents		(9,447	)		(70	)		3,186
Cash and cash equivalents:
Beginning of year		16,202			16,272			13,086
End of year	$	6,755		$	16,202		$	16,272

See notes to consolidated financial statements.

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Note A — Summary of Major Accounting Policies

Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Earnings per share are calculated in accordance with FAS 128 and are based on the weighted-average number of shares outstanding.

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 market value.

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 estimated 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 and other pertinent information.

Inventories

Inventories are stated at the lower of cost or market. The costs for approximately 94% of inventories at December 31, 2005 and 2004 are determined using the last-in, first-out (LIFO) method, with the remainder determined using the first-in, first-out method. Cost is comprised of materials, labor and an appropriate proportion of fixed and variable overheads, on an absorption costing basis.

Property, Plant and Equipment

Property, plant and equipment are stated on the basis of cost. Repairs and maintenance costs are expensed as incurred. Depreciation is computed principally by the straight-line method over the estimated useful lives of the assets. The estimated useful life ranges from 20 to 50 years for buildings and 5 to 10 years for machinery and equipment. Long-lived assets are reviewed for impairment losses 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 are recorded when the undiscounted cash flows estimated to be generated by those assets are less than the assets carrying amounts.

Goodwill and Intangibles

Goodwill in the amount of $4,053,000 resulted from an acquisition that occurred in 2002, and intangible assets in the amount of $3,283,000 relate to acquisitions that occurred in 2002 and 2005. The value of goodwill is tested for impairment as of October 1 of each year by an independent third party, or more frequently if events or circumstances change that would likely reduce the fair value below carrying value. The Company uses the fair market value approach to test for impairment. The fair market valuations used for the impairment tests can be affected by changes in the estimates of revenue multiples and the discount rate used in the calculations. Losses, if any, resulting from impairment tests will be reflected in operating income in the Company’s income statement. No impairment resulted from the annual reviews performed in 2005 or 2004.

Amortization of other intangible assets is calculated on the straight-line basis using the following lives:

Sales contracts	18 years
Drawings	15 years
Program logic	10 years

Revenue Recognition

Revenue from product sales is recognized when title passes which generally occurs upon shipment to the customer.

Concentration of Credit Risk

The Company does not require collateral from its customers and has generally had a good collection history. There were no sales to a single customer that exceeded 10% of total net sales for the years ended December 31, 2005, 2004 and 2003.

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Shipping and Handling Costs

The Company reflects 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, 2005, 2004 and 2003, totaled $3,553,000, $2,953,000 and $2,767,000, respectively.

Product Warranties

A liability is established for estimated future warranty and service claims based on historical claim 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 as follows:

(Thousands of dollars)	2005			2004
Balance at beginning of year	$	829		$	599
Warranty costs		1,889			2,014
Settlements		(1,441	)		(1,784	)
Balance at end of year	$	1,277		$	829

The increase in the year-end balance for 2005 is related to future potential warranty claims related to product supplied on a large order, the majority of which was shipped during 2005.

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) income within shareholders’ equity.

Gains and losses resulting from foreign currency transactions, the amounts of which are not material, are included in net income.

Reclassification

Certain amounts for 2004 have been reclassified to conform to the 2005 presentation.

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 financial statements and accompanying notes. Actual results could differ from those estimates.

New Accounting Pronouncements

In November 2004, the FASB issued SFAS No. 151 “Inventory Costs — an amendment of ARB No. 43, Chapter 4.” This Statement amends the guidance in ARB No. 43 to require idle facility expense, freight, handling costs, and wasted material (spoilage) be recognized as current-period charges. In addition, SFAS No. 151 requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 is effective for inventory costs incurred by the Company in 2006. The Company does not expect any major impact on the financial statements of the Company.

Financial Accounting Standards Board (FASB) Staff Position (FSP) 109-1, Application of FASB Statement No. 109, Accounting for Income Taxes, for the Tax Deduction Provided to U.S. Based Manufacturers by the American Job Creation Act of 2004, and FAS 109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provisions within the American Jobs Creation Act of 2004 were enacted on October 22, 2004.

FSP No. 109-1 clarifies how to apply SFAS No. 109 to the new law’s tax deduction for income attributable to “domestic production activities.” The fully phased-in deduction is up to nine percent of the lesser of taxable income or “qualified production activities income.” The staff proposal requires that the deduction be accounted for as a special deduction in the period earned not as a tax-rate reduction. The 2005 income tax calculations have incorporated this deduction.

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FSP No. 109-2, provides guidance under FASB Statement No. 109, “Accounting for Income Taxes,” with respect to recording the potential impact of the repatriation provisions of the American Jobs Creation Act of 2004 on enterprises’ income tax expense and deferred tax liability. The Company has not repatriated any foreign earnings as of December 31, 2005.

Note B — Allowance for Doubtful Accounts

The allowance for doubtful accounts was $537,000 and $581,000 at December 31, 2005 and 2004, respectively.

Note C — Inventories

The excess of replacement cost over LIFO cost is approximately $33,066,000 and $28,718,000 at December 31, 2005 and 2004, respectively. Replacement cost approximates current cost. Reserves for excess and obsolete inventory totaled $2,847,000 and $2,530,000 at December 31, 2005 and 2004, respectively.

Note D — Financing Arrangements

Under an unsecured demand line of credit which matures in June, 2007, the Company may borrow up to $10.0 million with interest at LIBOR plus .75% or at alternative rates as selected by the Company. At December 31, 2005, $9,565,000 was available for borrowing after deducting $435,000 for letters of credit. The Company has a $4.0 million unsecured revolving loan agreement which matures in May, 2007. At December 31, 2005, $845,000 was available for borrowing after deducting $3,155,000 for letters of credit. Interest is payable quarterly at LIBOR plus .55% or at alternative rates as selected by the Company.

The $10.0 million demand line of credit and the $4.0 million revolving loan agreement contain restrictive covenants, including limits on additional borrowings and maintenance of certain operating and financial ratios. At December 31, 2005, the Company was in compliance with such requirements.

Interest expense, which approximates interest paid, was $25,000, $40,000 and $56,000 in 2005, 2004 and 2003, respectively.

The Company has operating leases for certain offices, manufacturing buildings, land, office equipment and automobiles. Rental expenses relating to operating leases were $433,000, $670,000, and $709,000 in 2005, 2004 and 2003, respectively.

The future minimum lease payments due under these operating leases are as follows:

(Thousands of dollars)	2006		2007		2008		2009		2010		Thereafter
Minimum lease payments	$	483	$	336	$	246	$	189	$	68	$	807

Note E — Income Taxes

The components of income before income taxes are:

(Thousands of dollars)	2005		2004		2003
United States	$	15,618	$	13,011	$	13,522
Foreign		1,520		1,341		878
	$	17,138	$	14,352	$	14,400

The components of income tax expense are as follows:

(Thousands of dollars)	2005			2004			2003
Current expense:
Federal	$	3,188		$	2,702		$	4,390
Canadian		535			248			285
State and local		46			621			557
		3,769			3,571			5,232
Deferred expense (credit):
Federal		1,684			1,240			(429	)
Canadian		(44	)		(87	)		(98	)
State and local		826			351			(92	)
		2,466			1,504			(619	)
	$	6,235		$	5,075		$	4,613

The reconciliation between income tax expense and the amount computed by applying the statutory federal income tax rate of 35% to income before income taxes is as follows:

(Thousands of dollars)	2005			2004			2003
Income taxes at statutory rate	$	5,998		$	5,023		$	5,040
State and local income taxes, net of federal tax benefit		567			632			328
Tax credits		—			—			(536	)
Other		(330	)		(580	)		(219	)
	$	6,235		$	5,075		$	4,613

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Deferred tax assets and liabilities consist of the following:

(Thousands of dollars)	2005		2004		2003
Deferred tax assets
Inventories	$	1,327	$	2,181	$	2,239
Accrued liabilities		2,006		2,835		2,966
Postretirement health benefits obligation		8,132		8,718		8,799
Total deferred tax assets		11,465		13,734		14,004
Deferred tax liabilities
Depreciation and amortization		5,956		7,021		6,445
Other		3,109		1,848		1,190
Total deferred tax liabilities		9,065		8,869		7,635
Net deferred tax assets	$	2,400	$	4,865	$	6,369

The Company made income tax payments of $3,710,000, $5,930,000 and $3,235,000 in 2005, 2004 and 2003, respectively.

Note F — Pensions and Other Postretirement Benefits

The Company sponsors a defined benefit pension plan covering substantially all employees. Additionally, the Company sponsors a defined contribution pension plan at two locations not participating in the defined benefit pension plan. A 401-(k) plan that includes a partial Company match is also available. Contributions in 2005, 2004 and 2003 were $599,000, $573,000 and $563,000, respectively, for the defined contribution pension and 401-(k) plans. The Company also sponsors a non-contributory defined benefit health care plan that provides health benefits to substantially all retirees and their spouses. The Company funds the cost of these benefits as incurred.

The approximate allocation of plan assets for the defined benefit plan as of the measurement date of October 31 is as follows:

	2005			2004			Target
Equities		62	%		54	%		50 - 62	%
Fixed Income		32	%		38	%		32 - 45	%
Cash & Cash Equivalents		6	%		8	%		0 - 10	%

The expected rate of return on plan assets is based on historical rates of return, the weighting of plan assets by investment group, targeted weighting of assets and the current return trends. The Company has a diversified investment strategy of investing in fixed income instruments and common equities through mutual funds. The following table presents the plans’ funded status as of the measurement date reconciled with amounts recognized in the Company’s balance sheets:

	Pension						Postretirement
	Benefits						Benefits
(Thousands of dollars)	2005			2004			2005			2004
Change in benefit obligation
Benefit obligation at beginning of year	$	39,870		$	35,792		$	30,747		$	28,052
Service cost		1,999			1,870			1,074			1,050
Interest cost		2,222			2,143			1,758			1,731
Actuarial loss (gain)		4,255			3,499			(447	)		1,895
Benefits paid		(3,082	)		(3,434	)		(2,152	)		(1,981	)
Benefit obligation at end of year		45,264			39,870			30,980			30,747
Change in plan assets
Fair value of plan assets at beginning of year		31,738			29,078			—			—
Actual return on plan assets		1,922			2,320			—			—
Company contributions		5,840			3,774			2,152			1,981
Benefits paid		(3,082	)		(3,434	)		(2,152	)		(1,981	)
Fair value of plan assets at end of year		36,418			31,738			—			—
Funded status of the plan (under) funded		(8,846	)		(8,132	)		(30,980	)		(30,747	)
Unrecognized net actuarial loss		17,696			13,676			5,745			6,545
Unrecognized prior service cost		—			—			—			—
Prepaid/(accrued) benefit cost	$	8,850		$	5,544		$	(25,235	)	$	(24,202	)
Weighted-average assumptions
Discount rate		5.70	%		5.89	%		5.70	%		5.89	%
Expected rate of return on plan assets		8.00	%		8.00	%		—			—
Rate of compensation increase		3.50	%		3.50	%		—			—

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The accumulated pension benefit obligation is $34,909,000 and $30,642,000 at October 31, 2005 and 2004, respectively. The estimated Company contribution to the pension plan in 2006 is $1,538,000, while estimated expenditures for postretirement benefits are $1,989,000.

The following table presents the expected future pension benefits to be paid:

	Pension & Postretirement Benefits
(Thousands of dollars)	2006		2007		2008		2009		2010		2011-2015
Expected future payments
Pension	$	2,702	$	1,960	$	2,951	$	3,751	$	4,235	$	24,644
Postretirement	$	1,989	$	1,974	$	2,012	$	2,157	$	2,361	$	13,893

For measurement purposes, a 4.0% annual rate of increase in the per capita cost of covered health care benefits for retirees age 65 and over was assumed for 2006. The rate of increase is expected to remain constant going forward.

The following table presents the components of net periodic benefit cost:

	Pension									Postretirement
	Benefits									Benefits
(Thousands of dollars)	2005			2004			2003			2005		2004			2003
Service cost	$	1,999		$	1,870		$	1,660		$	1,074	$	1,050		$	963
Interest cost		2,222			2,143			2,164			1,758		1,731			1,640
Expected return on plan assets		(2,438	)		(2,237	)		(1,969	)		—		—			—
Amortization of prior service cost and unrecognized gain /(loss)		751			544			531			—		(739	)		(756	)
Recognized net actuarial gain /(loss)		—			—			—			339		201			26
Loss recognized due to settlement		—			—			1,110			—		—			—
Benefit cost	$	2,534		$	2,320		$	3,496		$	3,171	$	2,243		$	1,873

During 2003, the Company’s accumulated distributions to retirees exceeded pension service and interest costs requiring a portion of previously unrecognized pension losses associated with the distribution to be expensed. The additional pension cost of $1,110,000 represented a settlement loss resulting in an allocation of $777,000 to manufacturing expense and $333,000 to selling, general and administrative expense.

The assumed health care trend rate has a significant effect on the amounts reported for postretirement benefits. A one-percentage point change in the assumed health care cost trend rate would have the following effects:

	One-Percentage Point
(Thousands of dollars)	Increase		Decrease
Effect on total of service and interest cost components in 2005	$	247	$	(224	)
Effect on accumulated postretirement benefit obligation as of December 31, 2005	$	2,222	$	(2,012	)

In March 2004, the FASB issued Staff Position No. FAS 106-2,“Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003,” (“FSP No. 106-2”) in response to a new law regarding prescription drug benefits under Medicare (“Medicare Part D”) as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D.

Currently, Statement of Financial Accounting Standard No. 106,“Employers’Accounting for Postretirement Benefits Other Than Pensions” (“No. 106”) requires that changes in relevant law be considered in current measurement of postretirement benefit costs. FSP No. 106-2 is effective beginning in the third quarter of 2004. During 2005 it was determined that the Company’s plan is not actuarially equivalent to Medicare Part D, therefore no benefit has been recorded.

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Note G — Business Segment Information

The Company operates principally in one business segment, the design, manufacture and sale of pumps and related fluid control equipment for water, wastewater, construction, industrial, petroleum, original equipment, agriculture, fire protection, heating, ventilating and air conditioning (HVAC), military and other liquid-handling applications. The Company’s pumps are marketed in the United States and Canada through a network of approximately 1,000 distributors, through manufacturers’ representatives (for sales to many original equipment manufacturers), through third-party distributor catalogs, and by direct sales. Export sales are made primarily through foreign distributors and representatives. The Company exports to more than 90 countries around the world. The components of customer sales, determined based on the location of customers, are as follows:

(Thousands of dollars)	2005		%		2004		%		2003		%
United States	$	171,677		74	$	161,374		79	$	157,645		81
Exports to foreign countries		59,572		26		42,180		21		38,181		19
Total	$	231,249		100	$	203,554		100	$	195,826		100

Note H — Acquisitions

During 2005, the Company acquired a submersible pump line from a private European company. The purchase was made with cash from the Company’s treasury after the fair value of the acquired assets was determined by an independent third party evaluation. The addition of the pump line will complement and expand the Gorman-Rupp family of pumps currently offered in international markets.

Note I — Other Assets

The major components of other assets are as follows:

	December 31,
(Thousands of dollars)	2005			2004
Goodwill	$	4,053		$	4,053
Intangibles:
Trade names		1,020			1,020
Drawings		1,400			1,400
Other intangibles		863			687
Prepaid pension cost		8,850			5,544
Other assets		1,974			1,618
		18,160			14,322
Less — accumulated amortization		(625	)		(435	)
Total	$	17,535		$	13,887

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The Company operates principally in one business segment, the design, manufacture and sale of pumps and related fluid control equipment for water, wastewater, construction, industrial, petroleum, original equipment, agriculture, fire protection, heating, ventilating and air conditioning (HVAC), military, and other liquid-handling applications.

Results of Operations

2005 Compared to 2004

The Company recorded record net sales of $231.2 million in 2005 compared to $203.6 million in 2004, an increase of 13.6%. The record level of sales reflected continued strength in the economy that began in 2004. Growth in sales in the construction, industrial, municipal, fire protection and international markets all contributed to the increased sales revenue in 2005. The Mansfield Division had record shipments for the year, with commercial sales increasing $10.0 million. At Patterson Pump Company, fire protection sales increased $9.4 million from 2004 levels.

Export shipments amounted to $59.6 million in 2005 compared to $42.2 million in 2004, an increase of $17.4 million or 41.2%. Export shipments represented 26% of total net sales in 2005 compared to 21% in 2004. The increase was partially attributable to strength in Patterson Pump Company’s fire protection market; higher energy prices provided funds for the purchase of fire pumps by oil producing countries for new construction activities.

The backlog of orders at December 31, 2005 was $94.1 million compared to $69.0 million at December 31, 2004, an increase of $25.1 million or 36.4%. Patterson Pump Company’s backlog increased $20.3 million from December, 2004 levels, accounting for the majority of the increase. The current backlog of orders is expected to ship during 2006.

Cost of products sold in 2005 was $184.2 million compared to $161.1 million in 2004, an increase of $23.1 million or 14.3%. As a percent of sales, cost of products sold was 79.7% in 2005 compared to 79.2% in 2004. Upward pressure on raw material and energy costs were experienced throughout the year, along with higher inbound and outbound freight costs. As a percent of net sales, gross margins were 20.3% in 2005 and 20.8% in 2004.

Selling, general and administrative (SG&A) expenses in 2005 were $30.4 million compared to $29.0 million in 2004. As a percent of net sales, SG&A expenses were 13.1% during 2005 and 14.2% in 2004, with the decrease as a percent of sales due primarily to the higher sales volume. The Construction Exposition (CONEXPO) trade show, which is held every three years, resulted in expenses of $238,000 which was part of the overall increase in advertising costs of $600,000. Additionally, retirement costs increased $210,000 due to higher pension expense. Profit sharing expense increased $317,000 due to higher net operating income.

Other income in 2005 was $892,000 compared to $1,005,000 in 2004, a decrease of $113,000 or 11.2%. The decrease was primarily a result of reduced rental income as an idle manufacturing facility was sold early in 2005.

Other expense was $457,000 and $79,000 in 2005 and 2004, respectively. The increase resulted from foreign currency exchange losses related to the decline of the Euro against the U.S. Dollar.

The effective income tax rate was 36.4% in 2005, compared to 35.4% in 2004. The increase was primarily related to higher Canadian income tax expense.

Net income for 2005 was $10.9 million compared to $9.3 million in 2004, an increase of $1.6 million or 17.5%. As a percent of net sales, net income was 4.7% and 4.6% in 2005 and 2004, respectively. All of the Company’s subsidiaries and divisions were profitable in 2005.

Earnings per share was $1.02 in 2005 compared to $0.87 in 2004.

Cash dividends paid on common shares increased $0.01 per share during 2005 to $0.56 per share, and marked the 33rd consecutive year of increased cash dividends. The dividend yield at December 31, 2005 was 2.5%.

Results of Operations

2004 Compared to 2003

The Company recorded record net sales of $203.6 million in 2004 compared to $195.8 million in 2003, an increase of 3.9%. The 2004 sales reflected positive signs of recovery in the general economic environment and capital goods markets during the year, resulting from increased pump sales principally in the industrial, construction and international markets. Annual price increases on products ranged from 4.0% to 5.0% in 2004 and reflected a mid-year surcharge approximating 2.0%. The surcharge was imposed by several of the Company’s divisions in response to higher costs for steel and energy.

Export shipments to foreign countries amounted to $42.2 million in 2004 compared to $38.2 million in 2003,

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an increase of $4.0 million or 10.5%. These shipments represented 21% of net sales in 2004 compared to 19% in 2003.

The backlog of orders at December 31, 2004 was $69.0 million compared to $58.4 million at December 31, 2003, an increase of $10.6 million or 18.2%.

Cost of products sold in 2004 was $161.1 million compared to $154.0 million in 2003, an increase of $7.1 million or 4.6%. As a percent of sales, cost of products sold was 79.2% in 2004 compared to 78.6% in 2003. The increase in cost of goods sold was primarily due to higher sales volume. In addition, higher costs for steel and energy from suppliers impacted the cost of goods sold by approximately 1.0 to 1.5% and the unfavorable impact from volume-related costs and product mix partially offset the benefit of lower pension expense of $1.0 million. As a percent of sales, gross margins were 20.8% in 2004 and 21.4% in 2003.

Selling, general and administrative (SG&A) expenses in 2004 were $29.0 million compared to $28.0 million in 2003. As a percent of net sales SG&A expenses were 14.2% during 2004 and 14.3% in 2003. In 2004, expenses associated with the requirements of the Sarbanes-Oxley Act of 2002 were approximately $807,000, an increase of $605,000 compared to 2003. Additional increases in healthcare costs and advertising and travel expenses of $826,000 were partially offset by a reduction in pension expense of $450,000.

Pension expense decreased $1.4 million in 2004 compared to 2003, principally due to a transaction in the third quarter 2003 when the Company’s accumulated distributions to retirees exceeded pension service and interest costs requiring a portion of previously unrecognized pension losses associated with the distribution to retirees to be expensed. The expense of $1.1 million associated with the settlement loss transaction in 2003 was not required in 2004.

Other income in 2004 was $1,005,000 compared to $701,000 in 2003, an increase of $304,000 or 43.4%. The increase principally resulted from increased interest income.

Other expense was $79,000 and $164,000 in 2004 and 2003, respectively.

The effective income tax rate was 35.4% in 2004, compared to 32.0% in 2003. In 2004, the Company did not benefit from foreign tax credits generated in the fourth quarter of 2003 of approximately $536,000 or $0.05 per share.

Net income for 2004 was $9.3 million compared to $9.8 million in 2003, a decrease of $500,000 or 5.2%. As a percent of net sales, net income was 4.6% and 5.0% in 2004 and 2003, respectively. Earnings per share was $0.87 in 2004 compared to $0.92 in 2003.

Cash dividends paid on common shares increased during 2004 to $0.55 per share and marked the 32nd consecutive year of increased cash dividends. The dividend yield at December 31, 2004 was 2.4%. On July 22, 2004, the Company announced a 5 for 4 common stock split effective September 10, 2004 to shareholders of record as of August 13, 2004. The outstanding common stock was increased from 8,546,553 shares without par value to 10,682,697 shares without par value. Share and per share data for all periods presented have been restated to reflect the stock split.

Trends

The Company is not exposed to material market risks as a result of its export sales or operations outside of the United States. Export sales are denominated predominately in U.S. dollars and made on open account or with a letter of credit.

Numerous business entities in the pump and fluid-handling industries, as well as a multitude of companies in many other industries, have been targeted in a series of lawsuits in several jurisdictions by various individuals seeking redress to claimed injury as a result of the entities’ alleged use of asbestos in their products. The Company and three of its subsidiaries have been drawn into this mass-scaled litigation, typically as one of hundreds of co-defendants in a particular proceeding. (The vast majority of these cases are against Patterson Pump Company.) The allegations in the lawsuits involving the Company and/or its subsidiaries are vague, general and speculative, and most cases have not advanced beyond the early stage of discovery. In certain situations, the plaintiffs have voluntarily dismissed the Company and/or its subsidiaries from some of the lawsuits after the plaintiffs have acknowledged that there is no basis for their claims. In other situations, the Company and/or its subsidiaries have been dismissed from some of the lawsuits as a result of court rulings in favor of motions to dismiss and/or motions for summary judgment. In less than 10 cases, the Company and/or its subsidiaries have entered into nominal economic settlements, coupled with dismissal of the lawsuits. Insurers of the Company have engaged legal counsel to represent the Company and its subsidiaries and to protect their interests.

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In addition, the Company and/or its subsidiaries are parties in a small number of legal proceedings arising out of the ordinary course of business. Management does not currently believe that these proceedings, or the industry-wide asbestos litigation, will materially impact the Company’s results of operations, liquidity or financial condition.

Liquidity and Sources of Capital

Cash equivalents and short-term investments totaled $11.5 million and there was no debt at December 31, 2005. In addition, the Company had $10.4 million available in bank lines of credit after deducting $3.6 million in outstanding letters of credit. The Company was in compliance with all restrictive covenants, including limits on additional borrowings and maintenance of certain operating and financial ratios at December 31, 2005.

The Company’s purchase of a submersible pump line during 2005 was made with cash from the Company’s treasury. Capital expenditures for 2006, estimated to be $5.0 to $7.0 million, are expected to be financed through internally generated funds and existing credit arrangements. During 2005, 2004 and 2003, the Company financed its capital improvements and working capital requirements principally through internally generated funds, proceeds from short-term investments and line of credit arrangements with banks.

Cash provided by operating activities was $3.0 million, $14.5 million and $13.6 million in 2005, 2004 and 2003, respectively. In 2005, additional cash was used to support working capital requirements related to increased levels of inventory and accounts receivable to support higher sales and backlog levels.

Cash used for investing activities was $6.6 million, $9.0 million and $4.9 million for 2005, 2004 and 2003, respectively, and normally consists of investments in machinery and equipment. The Company’s 2005 net capital expenditures were $3.2 million compared to $7.5 million in 2004, a decrease of $4.3 million. The decrease in net capital expenditures resulted primarily from the purchase of a new Company aircraft in 2004.

Cash used for financing activities was $6.0 million in 2005, $5.9 million in 2004 and $6.0 million in 2003. Cash dividends constituted the major portion of cash outflows.

The changes in foreign currency translation against the U.S. dollar increased cash $102,000, $361,000 and $461,000 in 2005, 2004 and 2003, respectively.

The ratio of current assets to current liabilities was 3.9 to 1 and 4.6 to 1 at December 31, 2005 and 2004, respectively.

Management believes that the Company has adequate working capital and a healthy liquidity position.

Critical Accounting Policies

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States. When more than one accounting principle, or the method of its application, is generally accepted, management selects the principle or method that is appropriate in Gorman-Rupp’s specific circumstances. Application of these accounting principles requires management to make estimates about the future resolution of existing uncertainties; as a result, actual results could differ from these estimates. In preparing these financial statements, management has made its best estimates and judgments of the amounts and disclosures included in the financial statements, giving due regard to materiality. The Company does not believe there is a great likelihood that materially different amounts would be reported under different conditions or using different assumptions pertaining to the accounting policies described below.

Revenue Recognition

Substantially all of Gorman Rupp’s revenues are recognized when products are shipped to unaffiliated customers. The Securities and Exchange Commission’s Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition” provides guidance on the application of generally accepted accounting principles to selected revenue recognition issues. The Company has concluded that its revenue recognition policy is appropriate and in accordance with generally accepted accounting principles and SAB No. 104.

Allowance for Doubtful Accounts

The Company evaluates the collectibility of its accounts receivable based on a combination of factors. In circumstances where the Company is aware of a specific customer’s inability to meet its financial obligations to Gorman-Rupp (e.g., bankruptcy filings, substantial down-grading of credit scores, etc.), the Company records a specific reserve for bad debts against amounts due to reduce the net recognized receivable to the amount the Company reasonably believes will be collected. For all other customers, the Company recognizes reserves for bad debts based on the length of time the receivables are past due. If circumstances change (e.g., an unexpected material adverse change in a major customer’s ability to meet its financial obligations), the Company’s estimates of the recoverability of amounts due could be reduced by a material amount. Historically, the Company’s collection history has been good.

52

Inventories and Related Allowance

Inventories are valued at the lower of cost or market value and have been reduced by an allowance for excess and obsolete inventories. The estimated allowance is based on a variety of factors, including historical inventory usage and management evaluations. Historically, the Company has not experienced large write-offs due to obsolescence. The Company uses the last-in, first-out (LIFO) method for primarily all of its inventories.

Pension Plans and Other Postretirement Benefit Plans

The measurement of liabilities related to pension plans and other postretirement benefit plans is based on Management’s assumptions related to future events including interest rates, return on pension plan assets, compensation increases and health care cost trend rates. The Company uses a measurement date of October 31 for benefit plan determinations. The discount rates used to determine the present value of future benefits are based on effective yields of investment grade fixed income investments. The discount rate used to value pension plan and postretirement obligations was 5.70% at October 31, 2005, compared to 5.89% at October 31, 2004. Annual expense amounts are determined based on the discount rate at October 31 of the prior year. The expected rate of return on pension assets is designed to be a long-term assumption that will be subject to year-to-year variability. The rate for 2005 and 2004 was 8.00%. During 2005, the fair market value of pension assets increased. Actual pension plan asset performance will either reduce or increase unamortized losses which will ultimately affect net income. The rate of compensation increase was 3.50% in 2005 and 2004. The assumption used for the rate of increase in medical costs over the next five years was essentially unchanged from 2004 to 2005. The health care cost trend rate assumption has a significant effect on the amounts reported. For example, a one-percentage point change in the assumed health care cost trend rate would have the following effects:

	One-Percentage Point
(Thousands of dollars)	Increase		Decrease
Effect on total of service and interest cost components in 2005	$	247	$	(224	)
Effect on accumulated postretirement benefit obligation as of December 31, 2005	$	2,222	$	(2,012	)

The overall effect of changes noted in the above assumptions will increase pension and postretirement expenses.

Income Taxes

The Company accounts for income taxes in accordance with Statement of Financial Accounting Standard No. 109, “Accounting for Income Taxes,” which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. Realization of the Company’s deferred tax assets is principally dependent upon the Company’s achievement of projected future taxable income, which management believes is sufficient to fully utilize the deferred tax assets recorded.

Goodwill and Other Intangibles

The Company accounts for goodwill in a purchase business combination as the excess of the cost over the fair value of net assets acquired. Business combinations can also result in other intangible assets being recognized. Amortization of intangible assets, if applicable, occurs over their estimated useful lives. SFAS 142 establishes a two-step method for testing goodwill for impairment on an annual basis (or an interim basis if an event occurs that might reduce the fair value of a reporting unit below its carrying value). SFAS 142 also requires that an identifiable intangible asset that is determined to have an indefinite useful economic life not be amortized, but separately tested for impairment using a one-step fair value based approach. The value of goodwill is tested for impairment as of October 1 of each year, or more frequently if events or circumstances change that would likely reduce the fair value below carrying value. The Company uses the fair market value approach to test for impairment. The fair market valuations used for the impairment tests can be affected by changes in the estimates of the revenue multiples and the discount rate used in the calculations. Losses, if any, resulting from impairment tests will be reflected in operating income in the Company’s income statement. No impairment resulted from the annual reviews performed in 2005 or 2004.

Amortization of other intangible assets is calculated on the straight-line basis using the following lives:

Sales contracts	18 years
Drawings	15 years
Program logic	10 years

Other Matters

Transactions with related parties are in the ordinary course of business and are not material to Gorman-Rupp’s financial position, net income or cash flows. Gorman-Rupp does not have any off-balance sheet arrangements, financings or other relationships with unconsolidated “special purpose entities.” Gorman-Rupp is also not a party to any long-term debt agreements, or any material capital leases, operating leases or purchase obligations.

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Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States.

The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States, and that receipts and expenditures of the Company are being made only in accordance with authorizations of Management and Directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework inInternal Control – Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, Management concluded the Company maintained effective internal control over financial reporting as of December 31, 2005. Management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2005 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their attestation report which is included herein.

/s/ JEFFREY S. GORMAN

Jeffrey S. Gorman
President and Chief Executive Officer

/s/ ROBERT E. KIRKENDALL

Robert E. Kirkendall
Senior Vice President and Chief Financial Officer

February 23, 2006

54

The Board of Directors and Shareholders
The Gorman-Rupp Company

We have audited management’s assessment, included in the accompanying Report of Management on Internal Control Over Financial Reporting, that The Gorman-Rupp Company maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established inInternal Control-Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The Gorman-Rupp Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that The Gorman-Rupp Company maintained effective internal control over financial reporting as of December 31, 2005 is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, The Gorman-Rupp Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of The Gorman-Rupp Company as of December 31, 2005 and 2004, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2005 of The Gorman-Rupp Company and our report dated February 23, 2006 expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG LLP
Cleveland, Ohio
February 23, 2006

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(Thousands of dollars, except per share amounts)

	2005		2004		2003		2002
Operating Results:
Net sales	$	231,249	$	203,554	$	195,826	$	195,081
Gross profit		47,071		42,425		41,851		41,451
Income taxes		6,235		5,075		4,613		5,267
Net income		10,903		9,277		9,787		8,936
Depreciation and amortization		6,808		7,179		7,274		7,035
Interest expense		25		40		56		72
Return on net sales (%)		4.7		4.6		5.0		4.6
Sales dollars per employee		233.3		211.4		196.4		185.1
Income dollars per employee		11.0		9.6		9.8		8.5
Financial Position:
Current assets (1)	$	110,501	$	96,974	$	95,718	$	85,315
Current liabilities		28,219		21,112		21,908		19,282
Working capital (1)		82,282		75,862		73,810		66,033
Current ratio		3.9		4.6		4.4		4.4
Property, plant and equipment – net		51,505		54,812		54,338		57,757
Capital additions		3,189		7,500		3,698		5,765
Total assets (1)		179,541		165,673		162,395		154,302
Long-term debt		—		—		—		291
Shareholders’ equity		127,048		121,898		117,918		112,912
Dividends paid		5,983		5,907		5,809		5,550
Average number of employees		991		963		997		1,054
Shareholder Information:
Basic and diluted earnings per share	$	1.02	$	0.87	$	0.92	$	0.84
Cash dividends per share		.560		.552		.544		.520
Shareholders’ equity per share at December 31		11.89		11.41		11.04		10.58
Average number of shares outstanding		10,684,209		10,680,832		10,677,087		10,673,337

(1) Prior period amounts have been reclassified for deferred income taxes to conform to the 2005 presentation.

Summary of Quarterly Results of Operations

The following is a summary of unaudited quarterly results of operations for the years ended December 31, 2005 and 2004:

(Thousands of dollars, except per share amounts)

							Basic and
							Diluted
Quarter Ended 2005	Net Sales		Gross Profit		Net Income		Earnings per Share
First Quarter	$	52,037	$	9,785	$	1,654	$	0.15
Second Quarter		56,109		12,406		3,337		0.32
Third Quarter		58,980		11,370		2,675		0.25
Fourth Quarter		64,123		13,510		3,237		0.30
Total	$	231,249	$	47,071	$	10,903	$	1.02

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2001	2000		1999		1998		1997		1996		1995
$                       203,169	$	190,384	$	182,239	$	174,162	$	167,723	$	157,733	$	152,007
48,108		48,430		46,347		43,713		40,964		39,127		36,516
8,450		8,400		8,460		7,400		6,340		5,735		5,590
14,585		13,796		13,081		11,752		10,612		9,928		9,461
7,128		6,863		6,489		6,330		5,959		5,675		5,173
116		183		55		188		238		330		602
7.2		7.2		7.2		6.7		6.3		6.3		6.2
195.2		186.5		177.6		170.4		163.8		161.9		156.4
14.0		13.5		12.7		11.5		10.4		10.2		9.7
$                         90,575	$	83,745	$	79,641	$	80,012	$	83,151	$	71,926	$	71,401
18,103		19,079		17,439		17,431		17,036		15,199		19,727
72,472		64,666		62,202		62,581		66,115		56,727		51,674
5.0		4.4		4.6		4.6		4.9		4.7		3.6
53,895		57,885		53,609		43,916		40,919		40,549		42,163
3,139		11,439		16,182		9,327		6,329		4,036		8,229
149,569		147,337		138,331		128,933		129,321		117,650		119,816
—		3,413		3,107		783		6,689		3,796		7,188
109,366		101,455		93,751		85,162		79,516		72,737		67,240
5,475		5,322		5,152		4,983		4,821		4,567		4,466
1,041		1,021		1,026		1,022		1,024		974		972
$                             1.36	$	1.29	$	1.22	$	1.09	$	0.99	$	0.92	$	0.88
.512		.496		.480		.464		.448		.424		.416
10.25		9.48		8.73		7.94		7.39		6.75		6.25
10,694,292		10,728,482		10,731,849		10,749,144		10,761,351		10,770,961		10,733,836

(Thousands of dollars, except per share amounts)

							Basic and Diluted
Quarter Ended 2004	Net Sales		Gross Profit(2)		Net Income		Earnings per Share
First Quarter	$	49,431	$	10,096	$	2,207	$	0.21
Second Quarter		50,804		10,820		2,449		0.23
Third Quarter		52,392		10,860		2,056		0.19
Fourth Quarter		50,927		10,649		2,565		0.24
Total	$	203,554	$	42,425	$	9,277	$	0.87

⁽²⁾ Period amounts have been reclassified to conform to the 2005 presentation.

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Ranges of Stock Prices

The high and low sales price and dividends per share for common shares traded on the American Stock Exchange were:

	Sales Price of Common Shares								Dividends Per Share
	2005				2004				2005		2004
	High		Low		High		Low
First Quarter	$	23.99	$	21.36	$	21.79	$	18.64	$	.140	$	.136
Second Quarter		22.60		19.00		23.24		19.32		.140		.136
Third Quarter		27.99		20.20		22.12		18.96		.140		.140
Fourth Quarter		24.45		20.50		24.59		20.46		.140		.140

Shareholder information reported by Transfer Agent and Registrar, National City Bank, February 7, 2006.

	Holders		Shares
Individuals		1,177		1,781,448
Nominees, brokers and others		16		8,904,249
Total		1,193		10,685,697

An additional 395,278 common shares are held in Treasury.

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Safe Harbor Statement

This Annual Report contains various forward-looking statements and includes assumptions concerning The Gorman-Rupp Company’s operations, future results and prospects. These forward-looking statements are based on current expectations and are subject to risk and uncertainties. In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. The Gorman-Rupp Company provides the following cautionary statement identifying important economic, political and technological factors, among others, the absence of which could cause the actual results or events to differ materially from those set forth in or implied by the forward-looking statements and related assumptions.

Such factors include the following: (1) continuation of the current and projected future business environment, including interest rates and capital and consumer spending; (2) competitive factors and competitor responses to Gorman-Rupp initiatives; (3) successful development and market introductions of anticipated new products; (4) stability of government laws and regulations, including taxes; (5) stable governments and business conditions in emerging economies; (6) successful penetration of emerging economies; and (7) continuation of the favorable environment to make acquisitions, domestic and foreign, including regulatory requirements and market values of candidates.

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