UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the Quarterly Period Ended September 30, 20152016

Oror

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. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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 26,083,62326,091,123 shares of common stock, without par value, outstanding at October 23, 2015.28, 2016.

Page 1 of 22 pages

TheGorman-RuppThe Gorman-Rupp Company and Subsidiaries

Three and Nine Months Endednine months ended September 30, 20152016 and 20142015

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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.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.statements (unaudited).

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THE GORMAN-RUPP COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

See notes to condensed consolidated financial statements.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.statements (unaudited).

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PART I

NOTE A - 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 (consisting of normal recurring accruals) 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, 20152016 are not necessarily indicative of results that may be expected for the year ending December 31, 2015.2016. 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, 2014,2015, from which related information herein has been derived.

NOTE B - 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 to be either not applicable or are expected to have minimal impact on the Company’s consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02,“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. 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 cost 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 to have a material impact on its consolidated financial statements.

In May 2014, the Financial Accounting Standards BoardFASB 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. The original standard wasguidance 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 currently does not expectevaluating the impact the adoption of ASU 2014-09 towill have a material impact on its consolidated financial statements.statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

NOTE C - INVENTORIES

Inventories are stated at the lower of cost or market. The costs for approximately 73%71% of inventories at September 30, 20152016 and 75%73% of inventories at December 31, 20142015 are determined using the last-in, first-out (LIFO) method, with the remainder determined using the first-in, first-out (FIFO) method applied on a consistent basis. An annualactual 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.

The major components of inventories are as follows (net of LIFO reserves of $59.7 million and $57.9 million at September 30, 2015 and December 31, 2014, respectively):

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PART I –- CONTINUED

NOTE C - INVENTORIES – CONTINUED

The major components of 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):

NOTE D - 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 E - 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 thisthat date, in eligible locations, are eligible to participate in an enhanced 401(k) plan instead of the defined benefit pension plan. Employees hired prior to this dateJanuary 1, 2008 continue to accrue benefits. benefits under the Plan.

Additionally, the Company sponsors defined contribution pension plans made available to all domestic and Canadian employees.

The Company also sponsors a non-contributory defined benefit 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.

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PART I - CONTINUED

NOTE E - PENSION AND OTHER POSTRETIREMENT BENEFITS—CONTINUED

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

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PART I – CONTINUED

NOTE F –- ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

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

PART I – CONTINUED

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

NOTE G – ACQUISITION

In September 2015, the Company’s wholly-owned subsidiary, Gorman-Rupp Europe B.V., purchased the business of Hydro+ SA and Hydro+ Rental SPRL (collectively the “Hydro companies”) effective August 1, 2015 through internally generated cash flows totaling $3.4 million and assumed $2.0 million of bank debt. The allocation of the purchase price to the business acquired is preliminary and will be finalized pending completion of a fair value appraisal process and other purchase accounting matters. Based on the preliminary purchase price allocation for this acquisition, goodwill of $2.6 million was recorded.

The Hydro companies have been the Company’s Belgian pump and pump systems distributor since 1998, and in 2011 formed Hydro+ Rental to expand pump and pump system rentals in the same region. The Hydro companies’ principal products are centrifugal pumps supplied by the Company, and Hydro+ SA has begun converting some of these pumps into packaged pump station systems tailored for its European market. Combined annual revenues of the Hydro companies are approximately $4.0 million.

(Dollars in thousands)		Currency Translation Adjustments				Pension and Other Postretirement Benefits				Accumulated Other Comprehensive Income (Loss)
Balance at January 1, 2015		$	(4,338	)		$	(12,988	)		$	(17,326	)
Reclassification adjustments			—				4,478				4,478
Current period (charge) credit			(3,557	)			—				(3,557	)
Income tax expense			—				(1,642	)			(1,642	)
Balance at September 30, 2015		$	(7,895	)		$	(10,152	)		$	(18,047	)

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PART I – CONTINUED

Executive Overview and Outlook

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 develops initiatives to improve performance in these key areas.

PART I – CONTINUED

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

We continually 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.

Due to recent increased retirements and a related surge in lump sum pension payments, the Company recorded a U.S. GAAP-required $1.9 million non-cash pension settlement charge during the third quarter of 2015 relating to its defined benefit pension plan of which $1.3 million related to cost of products sold and $570,000 related to selling, general and administrative expenses. For the nine months ending September 30, 2015, the Company has recorded a $3.3 million non-cash pension settlement charge of which $2.3 million related to cost of products sold and $1.0 million related to selling, general and administrative expenses. We expect that a similar non-cash charge of approximately $1.0 million will occur during the fourth quarter of this year as additional expected retirements and related lump sum payments are made. The rate of retirements was less in 2014 and in the first quarter of 2015 and settlement charges were not required in those periods.

Net sales during the third quarter of 2015 were $104.2 million compared to a record $110.2 million during the third quarter of 2014, a decrease of 5.4%. Gross profit was $23.3 million for the third quarter of 2015, resulting in gross margin of 22.4% compared to 25.5% for the same period in 2014. Operating income was $8.9 million, resulting in operating margin of 8.6% for the third quarter of 2015 compared to an operating margin of 12.7% for the same period in 2014. Net income was $5.9 million during the third quarter of 2015 compared to $9.4 million in the third quarter of 2014 and earnings per share were $0.22 and $0.36 for the respective periods. The quarter’s gross profit and operating income margin declines were due principally to the sales volume decreases from 2014 to 2015, sales mix changes due to increased shipments and percentages of shipments of lower margin engine and motor equipped systems, and the non-cash pension settlement charge described above of 120 and 180 basis points, respectively. The non-cash pension settlement charge negatively impacted current quarter earnings per share by $0.05 per share.

Net sales during the first nine months of 2015 were $307.4 million compared to a record $330.0 million during the same period last year, a decrease of 6.8%. Gross profit was $71.4 million for the first nine months of 2015, resulting in gross margin of 23.2% compared to 25.0% for the same period in 2014. Operating income was $29.4 million, resulting in operating margin of 9.6% for the first nine months of 2015 compared to an operating margin of 12.8% for the same period in 2014. Net income was $19.8 million during the first nine months of 2015 compared to a record $28.3 million in the same period last year and earnings per share were $0.75 and $1.08 for the respective periods. The nine months gross profit and operating income margin declines were due principally to the sales volume decreases from the records in 2014, sales mix changes due to increased shipments and percentages of shipments of lower margin engine and motor equipped systems, and the non-cash pension settlement charge described above of 80 and 110 basis points, respectively. The non-cash pension settlement charge and currency translation negatively impacted the first nine months of 2015 earnings per share by $0.09 and $0.02 per share, respectively.

The Company’s backlog of orders was $138.8 million at September 30, 2015 compared to $170.0 million a year ago and $160.7 million at December 31, 2014. The decrease in backlog from a year ago is due primarily to approximately $37.5 million of shipments related to the PCCP project in the last twelve months. Although not yet enough to offset our order slowness compared to 2014, we did experience our highest amount of incoming orders of the last four quarters in the current quarter ended September 30, 2015. Approximately $17.8 million of orders related to the PCCP project remain in the September 30, 2015 backlog total. Approximately $8.1 million of the remaining PCCP project orders are scheduled to ship during the fourth quarter of 2015 and $9.7 million of related installation services are scheduled during the first three quarters of 2016.

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 continually reward shareholders with increased dividends, strategically reinvest our cash resources and preserve a strong balance sheet to position us for future growthacquisition and acquisitionproduct development opportunities. The Company had no bank debt as of September 30, 2016.

Net capital expendituressales during the third quarter were $91.3 million compared to $104.2 million during the third quarter of 2015, a decrease of 12.4% or $12.9 million. Excluding sales from the New Orleans Permanent Canal Closures & Pumps (“PCCP”) project of $1.6 million in the third quarter of 2016 and $9.8 million for the same period in 2015, net sales during the quarter decreased 5.0%. Domestic sales decreased 19.3% or $13.9 million while international sales increased 3.3% or $1.0 million compared to the same period in 2015. Gross profit was $22.7 million for the third quarter of 2016, resulting in gross margin of 24.8%, compared to gross profit of $23.3 million and gross margin of 22.4% for the same period in 2015. The quarter’s gross profit margin increase was due principally to favorable sales mix changes and a non-cash pension settlement charge of 120 basis points in the third quarter of 2015 which did not recur in the same period this year, partially offset by lower leverage due to sales volume decreases. Operating income was $9.9 million, resulting in operating margin of 10.8% for the third quarter of 2016, compared to operating income of $8.9 million and operating margin of 8.6% for the same period in 2015. The operating margin improvement was largely driven by a non-cash pension settlement charge totaling 180 basis points in third quarter of 2015 which did not recur in the same period this year and a gain on the sale of property, plant and equipment in the third quarter of 2016 of 110 basis points, offset by lower operating leverage due to sales volume decreases. Net income was $6.9 million during 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. Gain on the sale of property, plant and equipment increased the third quarter of 2016 earnings by $0.03 per share. Conversely, the non-cash pension settlement charge in the third quarter of 2015 reduced earnings by $0.05 per share.

Net sales for the nine months ended September 30, 2016 were $287.9 million compared to $307.4 million during the same period in 2015, a decrease of 6.3% or $19.5 million. Excluding sales from the PCCP project of $9.5 million in the first nine months of 2016 and $30.3 million in the first nine months of 2015, net sales for the first nine months increased 0.5%. Domestic sales decreased 8.1% or $16.7 million and international sales decreased 2.8% or $2.8 million. Of the total decrease in net sales in the first nine months of 2016, approximately $0.9 million was due to unfavorable foreign currency translation. Gross profit was $68.8 million for the first nine months of 2016, resulting in gross margin of 23.9%, compared to gross profit of $71.4 million and gross margin of 23.2% for the same period in 2015. The gross profit margin increase was due principally to a non-cash pension settlement charge of 80 basis points in the first nine months of 2015 which did not recur in the same period this year. Operating income was $28.6 million, resulting in operating margin of $6.69.9% for the first nine months of 2016, compared to operating income of $29.4 million consisted primarilyand operating margin of machinery9.6% for the same period in 2015. The operating margin improvement also was largely driven by a non-cash pension settlement charge totaling 110 basis points in the first nine months of 2015 which did not recur in the same period this year and a gain on the sale of property, plant and equipment a new operations facilityof 30 basis points in Ireland,the first nine months of 2016, offset by lower operating leverage due to sales volume decreases. Net income was $19.8 million during the first nine months of both 2016 and other building improvements. The Company also completed the acquisition of Hydro+ SA2015 and Hydro+ Rental SPRL (collectively the “Hydro companies”) for $3.4 million. Capital expendituresearnings per share were $0.76 and $0.75 for the fourth quarterrespective periods. Gain on the sale of property, plant and equipment increased the first nine months of 2016 earnings by $0.03 per share. Conversely, the non-cash pension settlement charge reduced the first nine months of 2015 are currently estimated to be in the range of $2 to $4 million and are expected to be financed through internally-generated funds.earnings by $0.09 per share.

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PART I – CONTINUED

At itsThe Company’s backlog of orders was $102.8 million at September 30, 2016 compared to $138.8 million at September 30, 2015 and $117.1 million at December 31, 2015. Excluding the PCCP project in 2015 and 2016, the backlog at September 30, 2016 was down 16.0% 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 22, 2015 meeting,27, 2016, the Board of Directors of the Company declared a quarterly cash dividend of $0.105$0.115 per share on the common stock of the Company, payable December 10, 2015,9, 2016, to shareholders of record November 13, 2015. The cash dividend represents a 5.0% increase over15, 2016. This will mark the dividend paid in the previous quarter. This marks the 263rd267th consecutive quarterly dividend paid by The Gorman-Rupp Company and the 43rd44th 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, 2016 was 1.6%.

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 uponon our assessment of the Company’s financial condition and business outlook at the applicable time.

Outlook

Domestic and foreign uncertainties, including turmoil related to the production and price of oil, foreign currency translation impacts and low commodity prices, continued to make the first nine months of 2016 challenging. The Company is pleased with Patterson Pump Company’s performance onfourth quarter of most years has been seasonally slower and the PCCP project for which shipments are generally complete. As periods of the large flood control pumps for New Orleans began in 2014,economic and it has been a larger contributor to net sales this year. When completed, this flood control project is anticipated to be one of the largest such projects in the world. Also, 2015 results will be the first full fiscal year that includes the operations of Bayou City Pump Company, which we acquired in June 2014 and adds market diversity for our petroleum handling products and services. We also are looking forward to the opportunities resulting from the acquisition of the Hydro companies in Belgium and blending their European pump and pump rental expertise with the Company’s 80-plus years of international design and manufacture of centrifugal pumps and pumping systems and its broad international distribution network.

Outlook

The business environment in most of the markets we serve has improved somewhat since the economic downturn in 2008 and 2009 as the U.S. economy has steadily recovered from the recession. However, the economic impacts of the rapid decline in oil and natural gas prices and related production during the last twelve months have had a substantial negative affect on our construction, rental and industrial pumps markets, and have indirectly impacted most of our other markets. Additionally, the related strength of the U.S. dollar has worked against our export sales, and lower commodity prices combined with unseasonably wet weather conditions in most parts of the United States negatively impacted agricultural sales. Despite these challenges,volatility persist, the Company expects that fireremains focused on operational efficiencies and municipal pump sales will continue to improve graduallymanage expenses closely as we do not yet see stable sales growth occurring in the near future. Our strong balance sheet provides us with the flexibility to continue to evaluate acquisition opportunities and our portion of the New Orleans PCCP flood control project will remain on schedule for the remainder of this year and 2016. Whilenew product development that we expect will help add value to our operations over the near-term, including most of 2016, to be similarly challenging, our outlook for the long-term is positive based on our proven track record of providing industry leading high quality products, a long-standing commitment to customer service and a very strong and flexible balance sheet.longer-term.

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

Third Quarter 20152016 Compared to Third Quarter 20142015

Net Sales

The third quarter activity in water end marketExcluding sales included $5.3 million of increased sales infrom the fire protection market due to higher international sales of $3.2 million to Middle-Eastern and Pacific-Rim countries and higher domestic sales of $2.1 million driven primarily by improvement in building construction and an overall increase in market share. Despite increased shipments of $6.4 million related to theNew Orleans Permanent Canal Closures and& Pumps (“PCCP”) project of $1.6 million in New Orleans,the third quarter of 2016 and $9.8 million for the same period in 2015, net sales during the quarter decreased 5.0%. Domestic sales decreased 19.3% or $13.9 million while international sales increased 3.3% or $1.0 million compared to the same period in 2015.

Sales in the third quarter of 2016 in our larger water markets decreased 8.9% or $6.5 million compared to the third quarter of 2015. Sales in the municipal market decreased $3.9$5.1 million overall driven primarily by reduced demand for large volume pumps for wastewater andPCCP 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 lack of government funding. Also,wet weather conditions in many locations domestically and lower farm income. However, sales in the construction market decreased $3.5increased $2.0 million due primarily to sales to rental businesses as a result of flooding in several areas domestically and a fleet purchase by a new customer. The remainder of the decline in drillingoverall sales decrease was largely due to reduced shipments of oil and gas in North America.repair parts.

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PART I – CONTINUED

Decreased salesSales decreased 20.3% or $6.4 million in the non-water end markets during the third quarter of 2015 were primarily due2016 compared to $2.3 millionthe third quarter of lower sales2015. Sales in the industrial market also largely duedecreased $4.2 million and sales in the petroleum market decreased $1.4 million, both principally attributable to the downturncontinued slowdown in oil and gas. In addition, sales in the OEM market decreased $1.1 million primarily due to lower sales of pumps for military applications.

Domestic sales decreased 7.9% or $6.2 million principally due to lower sales in the municipal and construction markets. International sales were comparable between periods with increased sales in the fire protection market offset by lower sales in all other markets. Of the total decrease in net sales in the third quarter of 2015 of $5.9 million, $1.7 million or 28.8% of the decrease was due to unfavorable foreign currency translation.gas production.

Cost of Products Sold and Gross Profit

The increaseimprovement in costgross margin in the third quarter of products sold as percent2016 compared to the third quarter of net sales2015 was principally due to sales volume decreases during the quarter,lower cost of material of 290 basis points driven by sales mix changes due to increased shipments and percentagesa favorable LIFO adjustment. In addition, pension expense was lower because of shipments of lower margin engine and motor equipped systems and higher pension cost of 146 basis points, of which $1.3 million or 120 basis points was attributable to thea non-cash pension settlement charge described above.of 120 basis points in the third quarter of 2015 which did not recur in the third quarter of 2016. Partially offsetting these favorable variances was lower leverage because of sales volume decreases.

Selling, General and Administrative Expenses (SG&A)

The increase in SG&A expenses as a percentpercentage of net sales isin the third quarter of 2016 compared to the third quarter of 2015 was due principally to loss of leverage due to higher pension costlower sales volume, increased professional services fees of 69approximately 50 basis points and increased healthcare costs of which $570,000 orapproximately 40 basis points. Offsetting these increases was a gain on the sale of property, plant and equipment in the third quarter of 2016 of 110 basis points. There was a pension settlement charge in the third quarter of 2015 of 60 basis points was attributable towhich did not recur in the non-cash pension settlement charge described above. The remaining difference is composedthird quarter of several smaller differences.2016.

Net Income

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PART I – CONTINUED

Net Income

The decreasesincrease in net income and earnings per share were principally due to decreased sales duringin the third quarter of $5.9 million, sales mix changes2016 compared to the third quarter of 2015 was due primarily to a gain on the sale of property, plant and theequipment in 2016, a favorable LIFO adjustment in 2016 and a pension settlement charge described above, netin the third quarter of 2015 which did not recur in the third quarter of 2016. These favorable variances were offset by lower sales volume. The decrease in the effective tax rate between the two periods was due primarily to a research and development tax credit being in effect in the third quarter of 2016 but not in the third quarter of 2015, changes in the estimated domestic production activities deduction and the impact of more income taxes, of $1.3 million or $0.05 per share.in jurisdictions with lower tax rates.

Nine Months 20152016 Compared to Nine Months 20142015

Net Sales

Excluding sales from the PCCP project of $9.5 million in the first nine months of 2016 and $30.3 million in the first nine months of 2015, net sales for the first nine months increased 0.5%. Domestic sales decreased 8.1% or $16.7 million and international sales decreased 2.8% or $2.8 million. Of the total decrease in net sales in the first nine months of 2016, approximately $0.9 million was due to unfavorable foreign currency translation.

Sales in the first nine months of 2016 in our larger water end markets decreased 4.6%6.8% or $10.7 million. Activity$14.9 million compared to the first nine months of 2015. Sales in the municipal market decreased $8.8 million driven by reduced PCCP project sales noted above, offset in part by increased shipments attributable to other flood control projects and clean water end markets included $12.0and wastewater applications. Sales decreased $3.1 million of increasedin the agriculture market principally due to wet weather conditions in many locations domestically and lower farm income, and sales in the fire protection market principallydecreased $2.2 million due to an increasemarket softness domestically and in market share and higher international sales to Middle-Eastern and Pacific-Rim countries. This increase was offset by $11.6 million of lower salescountries in the construction market due primarily to the decline in fracking activity in North America and the global decline in oil and gas production, which affected both domestic and international sales. Despite increased shipments of $22.9 million related to the PCCP project, sales in the municipal market decreased $7.7 million overall driven by reduced demand for large volume pumps for wastewater and water supply projects primarily due to lack of government funding. Also, sales decreased $5.1 million in the agricultural market primarily due to unseasonably wet weather conditions in most locations domestically and lower commodity prices.Middle East.

Sales decreased 11.9%5.3% or $11.9$4.6 million in non-water markets primarily dueduring the first nine months of 2016 compared to lowerthe first nine months of 2015. Increased sales of $2.6 million in the OEM market related to power generation equipment and pumps for military applications and residential appliances.

Domestic sales decreased 9.3% or $21.2services were offset by a decrease of $7.1 million principally due to lower sales in the construction, municipal, agricultureindustrial market largely attributable to the continued slowdown in oil and OEM markets. International sales decreased 1.3% or $1.4 million principally due to lower salesgas production.

Cost of Products Sold and Gross Profit

The improvement in gross margin in the construction, municipal and industrial markets, partially offsetfirst nine months of 2016 compared to the same period in 2015 was driven by higher salesa non-cash pension settlement charge in the fire protection market. Of the total decrease in net sales during thefirst nine month period ended September 30,months of 2015 of $22.6 million, $6.0 million or 26.7%80 basis points which did not recur in the same period in 2016, and a favorable LIFO adjustment of the decrease50 basis points in 2016. Partially offsetting these favorable variances was due to unfavorable currency translation.lower leverage because of sales volume decreases.

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PART I – CONTINUED

Cost of Products Sold and Gross Profit

The increase in cost of products sold as a percent of net sales was principally due to higher pension cost of 93 basis points, of which $2.3 million or 80 basis points was attributable to the non-cash pension settlement charge described above. In addition, labor and overhead increased as a percent of net sales due to volume decreases from 2014 to 2015 including increased health care expenses of approximately 36 basis points.

Selling, General and Administrative Expenses (SG&A)

The increase in SG&A expenses as a percentpercentage of net sales isin the first nine months of 2016 compared to the same period in 2015 was due principally to loss of leverage due to higher pension costlower sales volume and increased professional services fees of 34approximately 40 basis points of which $1.1 million or 30 basis pointsrelated largely to costs incurred in connection with acquired businesses during the previous two years. Offsetting these increases was attributable to thea non-cash pension settlement charge described above. The remaining increase is due primarily to volume decreasesof 30 basis points from 2014 tothe first nine months of 2015 andwhich did not recur in the inclusion of Bayou City Pump Company which was acquiredsame period in June 2014.2016.

Net Income

The decreasesincreases in net income and earnings per share in the first nine months of 2016 compared to the same period in 2015 were due primarily to a gain on the sale of property, plant and equipment, a favorable LIFO adjustment and lower pension expense due to decreased sales duringa pension settlement charge in the first nine months of 2015 which did not recur in the same period in 2016. These favorable variances were offset by sales volume decreases from 2015 to 2016. The decrease in the effective tax rate between the two periods was due primarily to a research and development tax credit being in effect in the first nine months of $22.6 million from2016 but not in the record 2014, sales mixfirst nine months of 2015, changes in the estimated domestic production activities deduction and the pension settlement charge described above, netimpact of more income taxes,in jurisdictions with lower tax rates.

Liquidity and Capital Resources

Cash and cash equivalents totaled $63.7 million and there was no outstanding bank debt at September 30, 2016. In addition, the Company had $23.9 million available in bank lines of $2.2credit after deducting $7.1 million or $0.09 per share.in outstanding letters of credit primarily related to customer orders. The Company has continuously been in compliance with its nominal restrictive covenants, such as limits on additional borrowings and maintenance of certain operating and financial ratios, including at September 30, 2016.

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Liquidity and Capital Resources

Cash and cash equivalents totaled $33.8 million, and there was $2.0 million in outstanding bank debt at September 30, 2015, having been reduced by $12.0 million since December 31, 2014. The Company assumed $2.0 million in bank debt as part of the acquisition of the Hydro companies in the third quarter. In addition, the Company had $24.0 million available in bank lines of credit after deducting $6.0 million in outstanding letters of credit primarily related to customer orders. The Company was in compliance with its nominal restrictive covenants, including limits on additional borrowings and maintenance of normal operating and financial ratios, at September 30, 2015.

Working capital rose $11.1increased $16.9 million from December 31, 20142015 to $147.4a record $162.8 million at September 30, 20152016. This increase was due principally due to the net decrease of short-term debt of $10.0 million during the period.higher cash balances partially offset by lower inventories and increased customer deposits.

The primary driverdrivers of operating cash flows during the first nine months of 2016 were operating income, reduced inventories and increased customer deposits partially offset by $8.0 million of contributions to the pension plan. During this same period in 2015, wasoperating cash flows were primarily driven by cash earnings during the period and a planned decrease in inventory levels.

During this same periodthe first nine months of 2016, investing activities of $4.3 million primarily consisted of capital expenditures for machinery and equipment, a new operations facility in 2014 operating cash flows were primarily drivenAfrica, and other building improvements totaling $5.6 million offset by record sales duringproceeds from the period.

sale of property, plant and equipment of $1.3 million. Capital expenditures for the fourth quarter of 2016 are currently expected to be in the range of $1 to $3 million and are expected to be principally financed through internally generated funds. During the first nine months of 2015, cash used in investing activities of $10.0 million primarily consisted of net capital expenditures of $6.6 million for machinery and equipment, a new operations facility in Ireland and other building improvements, and the acquisition of the Hydro companies for $3.4 million. During

Net cash used for financing activities for the first nine months of 2014, cash used in investing activities of $24.0 million primarily2016 consisted of the purchasedividend payments of the business of Bayou City Pump Company and capital expenditures for machinery and equipment and building improvements.

$8.2 million. Net cash used in financing activities for the first nine months of 2015 consisted of dividend payments of $7.9 million, re-payment of $12.0 million in short-term debt and a privately-arranged market value purchase of Company shares in the amount of $4.6 million from a Rupp family estate. During the first nine months of 2014, cash used in financing activities of $1.1 million consisted of dividend payments of $7.1 million and re-payment of $9.8 million in short-term debt, offset by $18.0 million which was borrowed to fund the acquisition of Bayou City Pump Company. The ratio of current assets to current liabilities was 3.8 to 1 at September 30, 2015 and 3.1 to 1 at December 31, 2014.

On October 22, 2015,27, 2016, the Board of Directors of the Company declared a quarterly cash dividend of $0.105$0.115 per share on the common stock of the Company, payable December 10, 2015,9, 2016, to shareholders of record November 13, 2015.15, 2016. The cash dividend represents a 5.0%9.5% increase over the dividend paid in the previous quarter. This markswill mark the 263rd267th consecutive quarterly dividend paid by The Gorman-Rupp Company and the 43rd44th consecutive year of increased dividends paid to its shareholders.

The Company currently expects to continue its distinguished 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.

Critical Accounting Policies

Our critical accounting policies are described in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and in the notes to our Consolidated Financial Statements for the year ended December 31, 20142015 contained in our Fiscal 2014 Annual Report on Form 10-K.

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10-K for the year ended December 31, 2015. Any new accounting policies or updates to existing accounting policies as a result of new accounting pronouncements have been discussed in the notes to our Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q. The application of our critical accounting policies may require management to make judgments and estimates about the amounts reflected in the Consolidated Financial Statements. Management uses historical experience and all available information to make these estimates and judgments, and different amounts could be reported using different assumptions and estimates.

Safe Harbor Statement

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: This Form 10-Q contains various forward-looking statements based on assumptions concerning The Gorman-Rupp Company’s operations, future results and prospects. These forward-looking statements are based on current expectations about important economic, political, and technological factors, among others, and are subject to risks and uncertainties, 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, but are not limited to: (1) continuation of the current and projected future business environment, including interest rates, changes in foreign exchange rates, commodity pricing and capital and consumer spending;spending and volatility in domestic oil production activity; (2) competitive factors and competitor responses to initiatives of The Gorman-Rupp Company; (3) successful development and market introductions of anticipated new products; (4) stability of government laws and regulations,

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including taxes; (5) stable governments and business conditions in emerging economies; (6) successful penetration of emerging economies; (7) unforeseen delays or disruptions in the New Orleans flood control project, including any further revisions to the timing of shipments for the project; (8) continuation of the favorable environment to make acquisitions, domestic and foreign, including regulatory requirements and market values of potential candidates and our ability to successfully integrate and realize the anticipated benefits of completed acquisitions; (8) if acquired businesses do not meet performance expectations, assets acquired could be subject to impairment; and (9) risks described from time to time in our reports filed with the Securities and Exchange Commission. Except to the extent required by law, we do not undertake and specifically decline any obligation to review or update any forward-looking statements or to publicly announce the results of any revisions to any of such statements to reflect future events or developments or otherwise.

The Company’s foreign operations do not involve material risks due to their relative size, both individually and collectively. Approximately 90% of the Company’s sales are domiciled within or originated from the United States. The Company does not believe it is not exposed to material market risks as a result of its diversified export sales. Export sales generally are denominated in U.S. Dollars and made on open account or under letters of credit.

Evaluation of Disclosure Controls and Procedures

The Company maintains a set of disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. The Company’s disclosure controls and procedures are also designed to ensure that information required to be disclosed in Company reports filed under the Securities Exchange Act of 1934 is accumulated and communicated to the Company’s Management, including the principal executive officer and the principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

An evaluation was carried out under the supervision and with the participation of the Company’s Management, including the principal executive officer and the principal financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this report on Form 10-Q. Based on that evaluation, the principal executive officer and the principal financial officer have concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2015.

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2016.

Changes in Internal Control Over Financial Reporting

There have beenwere no changes in the Company’s internal control over financial reporting that occurred during the last fiscal quarter ended September 30, 2015 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II OTHER INFORMATION

There are no material changes from the legal proceedings previously reported in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014.2015.

ThereExcept as noted below, there are no material changes from the risk factors previously reported in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014.2015.

Impairment - If acquired businesses do not meet performance expectations, assets acquired could be subject to impairment.

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Issuer PurchasesThe Company’s total assets reflect goodwill from acquisitions, representing the excess cost over the fair value of Equity Securities

The following table summarizesthe identifiable net assets acquired, including other indefinite-lived intangible assets and long-lived assets. Goodwill and other indefinite-lived intangible assets are not amortized but are reviewed annually for impairment as of October 1 or whenever events or changes in circumstances indicate there may be a possible permanent loss of value using either a quantitative or qualitative analysis. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount may not be recovered through future net cash flows generated by the assets. If future operating performance at one or more of the Company’s common share repurchase activityreporting units were to fall significantly below forecast levels or if market conditions for one or more of its acquired businesses were to decline, the quarter ended September 30, 2015:Company could be required to incur a non-cash charge to operating income for impairment. Any impairment in the value of these assets could have an adverse non-cash impact on the Company’s reported results of operations.

ITEM 6.

ITEM 6.EXHIBITS

EXHIBITS

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

2019