UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM10-Q

For the Quarterly Period Ended June 30, 2016March 31, 2017

or

For the transition period from                    to                    

Commission File Number1-6747

The Gorman-Rupp Company

(Exact name of registrant as specified in its charter)

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of RegulationS-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, anon-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule12b-2 of the Exchange Act. (Check one):

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).    Yes  ¨☐    No  x☒

There were 26,091,12326,093,123 shares of common stock, without par value, outstanding at July 29, 2016.

Page 1 of 21 pagesApril 28, 2017.

The Gorman-Rupp Company and Subsidiaries

Three and six months ended June 30,March 31, 2017 and 2016 and 2015

PART I. FINANCIAL INFORMATION

ITEM 1—FINANCIAL STATEMENTS (UNAUDITED)

THE GORMAN-RUPP COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

See notes to condensedconsolidated financial statements (unaudited).

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

See notes to consolidated financial statements (unaudited).

THE GORMAN-RUPP COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMEBALANCE SHEETS (UNAUDITED)

See notes to condensed consolidated financial statements (unaudited).

THE GORMAN-RUPP COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

See notes to condensed consolidated financial statements (unaudited).

THE GORMAN-RUPP COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

See notes to condensed consolidated financial statements (unaudited).

PART I

(Amounts in tables in thousands of dollars)

NOTE A1 - BASIS OF PRESENTATION OF FINANCIAL STATEMENTS

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and in accordance with the instructions to FormForm 10-Q and do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The consolidated financial statements include the accounts of The Gorman-Rupp Company (the “Company” or “Gorman-Rupp”) and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. In the opinion of management of the Company, all adjustments considered necessary for a fair presentation have been included. Certain amounts for 2015 have been reclassified to conform to the 2016 presentation. Operating results for the three and six months ended June 30, 2016March 31, 2017 are not necessarily indicative of results that may be expected for the year ending December 31, 2016.2017. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form10-K for the year ended December 31, 2015,2016, from which related information herein has been derived.

NOTE B2 - RECENTLY ISSUED ACCOUNTING STANDARDS

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

In March 2017, the FASB issued ASUNo. 2017-07, “Compensation – Retirement Benefits (Topic 715) – Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost”, which provides additional guidance on the presentation of net periodic pension and postretirement benefit costs in the income statement and on the components eligible for capitalization. The amendments in this ASU require that an employer report the service cost component of the net periodic benefit costs in the same income statement line item as other compensation costs arising from services rendered by employees during the period. Thenon-service-cost components of net periodic benefit costs are to be presented in the income statement separately from the service cost components and outside a subtotal of income from operations. The ASU also allows for the capitalization of the service cost components, when applicable (i.e., as a cost of internally manufactured inventory or a self-constructed asset). The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The amendments in this ASU are to be applied retrospectively. The Company is currently assessing the impact this ASU will have on its consolidated financial statements.

In January 2017, the FASB issued ASUNo. 2017-04, “Intangibles – Goodwill and Other (Topic 350) – Simplifying the Test for Goodwill Impairment”, which eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. The ASU is effective for impairment tests performed in fiscal years, and interim periods within those years, beginning after December 15, 2019. The amendments in this ASU are to be applied on a prospective basis and are not expected to have a significant impact on the Company’s consolidated financial statements.

In February 2016, the FASB issued ASU2016-02,“Leases “Leases (Topic 842),” which requires lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by all leases with a term of more than one year. Accounting by lessors will remain similar to existing generally accepted accounting principles.U.S. GAAP. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. The Company currently does not expect the adoption of ASU2016-02 to will have a material impact on its consolidated financial statements.

In November 2015, the FASB issued ASU 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes” which amended accounting guidance related to the presentation of deferred tax liabilities and assets. The amended guidance requires that all deferred tax liabilities and assets be classifiedstatements as noncurrent on the balance sheet. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016; however, early adoption is permitted. The Company adopted ASU 2015-17 during the quarter ended December 31, 2015. No prior periods were retrospectively adjusted.

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 approximately 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 doesits future minimum lease commitments are 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.material.

In May 2014, the FASB issued ASU2014-09, “Revenue “Revenue from Contracts with Customers (Topic 606),” which supersedes most current revenue recognition guidance, including industry-specific guidance, and requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. Subsequent accounting standards updates have been issued, which amend and/or clarify the application of ASU2014-09.The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016; however, in July 2015, the FASB approved a one year deferral of this standard, with a new effective date for fiscal years beginning after December 15, 2017. The Company is in the process of executing its implementation plan and has determined it will use the modified retrospective method as its transition method in the adoption of the new revenue standard. The Company has identified all material revenue streams and is currently does not expectevaluating its significant contracts, accumulating information that will be necessary for implementation disclosures and assessing the impact the adoption of ASU2014-09 towill have a material impact on its consolidated financial statements.statements and related disclosures.

PART I – CONTINUED

NOTE 2 - RECENTLY ISSUED ACCOUNTING STANDARDS – CONTINUED

The Company is in the process of identifying and implementing changes to processes and controls to meet the ASU’s updated reporting and discosure requirements and continues to update its assessment of the impact of the ASU. The Company will continue its evaluation of this new guidance through the date of adoption.

NOTE C3 - INVENTORIES

Inventories are stated at the lower of cost or market. The costs for approximately 72%70% of inventories at June 30, 2016March 31, 2017 and 73%72% of inventories at December 31, 20152016 are determined using thelast-in,first-out (LIFO) method, with the remainder determined using thefirst-in,first-out (FIFO) method applied on a consistent basis. An actual valuation of inventory under the LIFO method is made at the end of each year based on the inventory levels and costs at that time.

PART I – CONTINUED

NOTE C - INVENTORIES – CONTINUED

Interim LIFO calculations are based on management’s estimate of expectedyear-end inventory levels and costs and are subject to the finalyear-end LIFO inventory valuation.

The major components of inventories are as follows (net of LIFO reserves of $60.0$59.2 million and $59.1$58.4 million at June 30, 2016March 31, 2017 and December 31, 2015,2016, respectively):

NOTE D4 - PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of the following:

NOTE 5 - PRODUCT WARRANTIES

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

NOTE E6 - PENSION AND OTHER POSTRETIREMENT BENEFITS

The Company sponsors a defined benefit pension plan (“Plan”) covering certain domestic employees. Benefits are based on each covered employee’s years of service and compensation. The Plan is funded in conformity with the funding requirements of applicable U.S. regulations. The Plan was closed to new participants effective January 1, 2008.

PART I – CONTINUED

NOTE 6 - PENSION AND OTHER POSTRETIREMENT BENEFITS – CONTINUED

Employees hired after thatthis date, in eligible locations, are eligible to participate in an enhanced 401(k) plan instead of the defined benefit pension plan.Plan. Employees hired prior to January 1, 2008this date continue to accrue benefits under the Plan.benefits.

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

PART I – CONTINUED

NOTE E - PENSION AND OTHER POSTRETIREMENT BENEFITS – CONTINUEDThe Company also sponsors anon-contributory defined benefit postretirement health care plan that provides health benefits to certain domestic and Canadian retirees and their spouses. The Company funds the cost of these benefits as incurred.

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

PART I – CONTINUED

NOTE F7 - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

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

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

PART I – CONTINUED

NOTE 7 - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) – CONTINUED

Executive Overview

(Amounts in tables in thousands of dollars)

Executive Overview

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

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

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

PART I – CONTINUED

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

The Company places a strong emphasis on cash flow generation and having excellent liquidity and financial flexibility. This focus has afforded us the continuing ability to reinvest our cash resources and preserve a strong balance sheet to position us for future acquisition and product development opportunities. The Company had no bank debt as of June 30, 2016.March 31, 2017.

Net sales during the secondfirst quarter were $96.3$92.6 million compared to $103.9$100.3 million during the secondfirst quarter of 2015,2016, a decrease of 7.3%7.6% or $7.6$7.7 million. Excluding sales from the New Orleans Permanent Canal Closures & Pumps (“PCCP”) project of $2.5$0.4 million in the secondfirst quarter of 20162017 and $11.7$5.3 million for the same period in 2015,2016, net sales during the quarter increased 1.7%. Sales in the second quarter of 2016 in our larger water markets decreased 12.0%2.9% or $9.2 million while sales increased 5.6% or $1.5 million in our non-water markets.$2.8 million. Domestic sales, excluding PCCP, decreased 7.7%5.8% or $5.3$3.6 million while international sales decreased 6.7%increased 2.6% or $2.3$0.8 million compared to the same period in 2015. Of the total decrease in net sales in the second quarter, approximately $0.4 million was due to unfavorable foreign currency translation. 2016.

Gross profit was $23.2$21.2 million for the secondfirst quarter of 2016,2017, resulting in gross margin of 24.1%22.9%, compared to gross profit of $24.1$22.9 million and gross margin of 23.2%22.8% for the same period in 2015. 2016. Gross margin includes anon-cash pension settlement charge of $1.1 million or 110 basis points in the first quarter of 2017 which did not occur in the first quarter of 2016. Excluding thenon-cash pension settlement charge, the 120 basis point increase in gross margin was due principally to favorable sales mix. Offsetting the sales mix benefit was a 60 basis point increase in healthcare expenses and an increase in overhead expenses as a percent of sales driven by lower leverage due to sales volume decreases.

Selling, general and administrative expense (“SG&A”) was $14.2 million for the first quarter of 2017 and 15.3% of net sales, compared to $13.7 million and 13.6% of net sales for the same period in 2016. SG&A includes anon-cash pension settlement charge of $0.6 million or 70 basis points in the first quarter of 2017 which did not occur in the first quarter of 2016. The 100 basis point increase in SG&A as percent of sales, excluding thenon-cash pension settlement charge, was due principally to loss of leverage due to lower sales volume and a 40 basis point increase in travel and advertising expense. Excluding thenon-cash pension settlement charge, SG&A decreased slightly compared to the same period last year.

Operating income was $9.5$7.0 million, resulting in operating margin of 9.9%7.5% for the secondfirst quarter of 2016,2017, compared to operating income of $9.9$9.2 million and operating margin of 9.5%9.2% for the same period in 2015.2016. The quarter’s gross profitdecline in operating margin increase was due principally to sales mix changes and lower pension expense aslargely driven by a result of a non-cash pension settlement charge of 100180 basis points in the secondfirst quarter of 20152017 which hasdid not recurred this year. The operating margin increase also was largely driven by an additional 40 basis points from the pension settlement chargeoccur in the second quarter of 2015 which has not recurred this year. same period in 2016 and lower operating leverage due to sales volume decreases.

Net income was $6.6$5.1 million during the second quartersfirst quarter of 2017 compared to $6.3 million in the first quarter of 2016 and 2015 and earnings per share were $0.25 for both periods. The non-cash pension settlement charge reduced the second quarter of 2015 earnings per share by $0.04 per share.

Net sales for the six months ended June 30, 2016 were $196.5 million compared to $203.1 million during the same period in 2015, a decrease of 3.3% or $6.6 million. Excluding sales from the PCCP project of $7.9 million in the first half of 2016$0.19 and $20.5 million in the first half of 2015, net sales for the first half increased 3.3%. Sales in the first half of 2016 in our larger water markets decreased 5.7% or $8.4 million while sales increased 3.1% or $1.8 million in our non-water markets. Domestic sales decreased 2.1% or $2.8 million and international sales decreased 5.6% or $3.8 million. Of the total decrease in net sales in the first half of 2016, approximately $0.9 million was due to unfavorable foreign currency translation. Gross profit was $46.1 million for the first six months of 2016, resulting in gross margin of 23.5%, compared to gross profit of $48.1 million and gross margin of 23.7% for the same period in 2015. Operating income was $18.8 million, resulting in operating margin of 9.5% for the first six months of 2016, compared to operating income of $20.5 million and operating margin of 10.1% for the same period in 2015. The gross profit and operating income margin declines for the first half were due principally to the sales volume decreases from 2015 to 2016. The gross margin and operating margin for the first six months of 2015 were reduced by a non-cash pension settlement charge of 40 and 70 basis points, respectively, which has not recurred this year. Net income was $12.9 million during the first six months of 2016 compared to $13.9 million for the same period in 2015 and earnings per share were $0.49 and $0.53$0.24 for the respective periods. The Anon-cash pension settlement charge reduceddecreased the first six monthsquarter of 20152017 earnings per share by $0.04 per share.

The Company’s backlog of orders was $107.7$96.9 million at June 30, 2016March 31, 2017 compared to $144.2$111.0 million at June 30, 2015March 31, 2016 and $117.1$98.8 million at December 31, 2015.2016. Excluding the PCCP ordersproject in 20152017 and 2016, the backlog at June 30, 2016 isMarch 31, 2017 was down 10.1%8.6% as compared to June 30, 2015.

PART I – CONTINUED

The decrease in backlog from last year is due primarily to approximately $25.0 million of shipments relatedMarch 31, 2016. In addition to the impact of PCCP, project in the last twelve months along withbacklog has been impacted by lower orders in the petroleum and agriculture markets. Incoming orders during the second quarter of 2016 remained steady as compared to the first quarter of 2016 as orders increased in the municipal and construction markets while orders decreased in the fire protection and OEM markets. Approximately $2.7 million of orders related to the PCCP project remain in the June 30, 2016 backlog total and are expected to ship by the end of the third quarter of 2016. When completed, this flood control project will be one of the largest such projects in the world.

On July 28, 2016,April 27, 2017, the Board of Directors ofauthorized the Company declaredpayment of a quarterly cash dividend of $0.105$0.115 per share, onrepresenting the common stock of the Company, payable September 9, 2016, to shareholders of record August 15, 2016. This will mark the 266th269th consecutive quarterly dividend to be paid by The Gorman-Ruppthe Company. During 2015, the Company again paid increased dividends and thereby attained its forty-third consecutive year of increased dividends. 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 June 30, 2016March 31, 2017 was 1.5%.

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

Outlook

Domestic and foreign uncertainties, including turmoil related to the production and price of oil extensive foreign currency translation impacts and low commodity prices continuedcontinue to make 2017 challenging. In addition, with the first halfcompletion of 2016 challenging. The second halfthe PCCP project, comparisons of most years is seasonally slower, and the remainder ofrevenue with 2016 will compareneed to a second halfbe appropriately adjusted during 2017. We are encouraged by the new federal administration’s attention to increased spending for water and wastewater infrastructure, military growth and renewed pipeline projects. Along with the administration’s focus on U.S. manufacturing, these initiatives could have positive impacts for Gorman-Rupp as the majority of 2015our products continue to be manufactured domestically. We are also hopeful that included substantial PCCP sales. As periods of economic and business volatility persist,capital spending in the oil & gas industries will start to rebound as oil prices begin to stabilize. The Company remains focused on operational efficiencies and will continue to manage expenses closely asclosely. Our underlying fundamentals remain strong and we do not yet see stable sales growth occurring in the near future. Our strong balance sheet provides us with the flexibility to continue to evaluate acquisition opportunities and new product development that will help add value to our operations over the longer-term

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

Second Quarter 2016 Compared to Second Quarter 2015

Net Sales

Domestic sales decreased 7.7% or $5.3 million while international sales decreased 6.7% or $2.3 million compared to the same period in 2015. Of the total decrease in net sales in the second quarter, approximately $0.4 million was due to unfavorable foreign currency translation. Excluding sales from the New Orleans Permanent Canal Closures & Pumps (“PCCP”) project of $2.5 million in the second quarter of 2016 and $11.7 million for the same period in 2015, net sales during the quarter increased 1.7%.

Sales in the second quarter of 2016 in our larger water markets decreased 12.0% or $9.2 million. Sales in the municipal market decreased $4.9 million driven by reduced PCCP project sales noted above, offset in part by increased shipments attributable to other Gulf Coast flood control projects and other wastewater applications. Sales in the fire protection market decreased $3.2 million largely due to reduced international shipments, and sales in the agriculture market decreased $2.1 million principally due to wet weather conditions in most locations domestically and lower farm income. However, sales in the construction market increased $1.6 million driven primarily by domestic sales of engine-driven pump systems and pumps for applications independent of oil and gas.

PART I – CONTINUED

Sales increased 5.6% or $1.6 million in non-water markets during the second quarter. The net increase included increased sales of $2.6 million in the OEM market related to power generation equipment and services, as well as increased sales of fuel-handling pumps for military applications.

Cost of Products Sold and Gross Profit

The increase in gross margin in the second quarter of 2016 compared to the second quarter of 2015 was principally due to lower cost of material driven by sales mix changes. In addition, labor decreased 80 basis points due principally to lower pension expense because of a non-cash pension settlement charge of 100 basis points in the second quarter of 2015 which did not recur in the second quarter of 2016. Partially offsetting these favorable variances were higher warranty services and depreciation expenses of approximately 42 and 35 basis points, respectively.

Selling, General and Administrative Expenses (SG&A)

The increase in SG&A expenses as a percentage of net sales in the second quarter of 2016 compared to the second quarter of 2015 was due principally to lower sales volume and increased professional services of approximately 31 basis points related largely to costs incurred in connection with recently acquired businesses. Offsetting these increases was lower pension expense because of a non-cash pension settlement charge of 40 basis points from the second quarter of 2015 which did not recur in the second quarter of 2016.

Net Income

PART I – CONTINUED

The decrease in net income in the second quarter of 2016 compared to the second quarter of 2015 was due primarily to lower sales volume. The decrease in the effective tax rate between the two periods is due primarily to a research and development tax credit being in effect in the second quarter of 2016 but not in the second quarter of 2015, changes in the estimated domestic production activities deduction and the impact of more income in jurisdictions with lower tax rates.

Six Months 2016 Compared to Six Months 2015

Net Sales

Domestic sales decreased 2.1% or $2.8 million and international sales decreased 5.6% or $3.8 million. Of the total decrease in net sales in the first half of 2016, approximately $0.9 million was due to unfavorable foreign currency translation. Excluding sales from the PCCP project of $7.9 million in the first half of 2016 and $20.5 million in the first half of 2015, net sales for the first half increased 3.3%.

Sales in the first half of 2016 in our larger water markets decreased 5.7% or $8.4 million. Sales in the municipal market decreased $3.7 million driven by reduced PCCP project sales noted above, offset in part by increased shipments attributable to other Gulf Coast flood control projects and other wastewater applications. Sales decreased $1.9 million in the fire protection market due to a decline in international shipments, and sales in the agriculture market decreased $1.3 million principally due to wet weather conditions in most locations domestically and lower farm income.

Sales increased 3.1% or $1.8 million in non-water markets. The net increase was primarily due to increased sales of $3.4 million in the OEM market related to power generation equipment and services, and increased sales of $1.3 million in the petroleum market due to mid-stream transmission of refined petrochemical products. Partially offsetting these increases was a decrease of $2.9 million in the industrial market largely attributable to the downturn in oil and gas production and the related decline in the offloading of oil from barges due to excess inventory.

Cost of Products Sold and Gross Profit

The decrease in gross margin in the first half of 2016 compared to the same period in 2015 was principally driven by sales mix changes and higher warranty services and depreciation expenses of approximately 24 and 22 basis points, respectively. Partially offsetting these unfavorable variances was lower labor expense of approximately 71 basis points because of a non-cash pension settlement charge of 40 basis points in the first half of 2015 which did not recur in the same period in 2016 and lower headcount from normal employee retirements.

PART I – CONTINUED

Our strong balance sheet provides us with the flexibility to continue to evaluate acquisition opportunities and new product development that we expect will help add value to our operations over the longer-term.

First Quarter 2017 Compared to First Quarter 2016

Net Sales

Net sales during the first quarter were $92.6 million compared to $100.3 million during the first quarter of 2016, a decrease of 7.6% or $7.7 million. Excluding sales from the PCCP project of $0.4 million in the first quarter of 2017 and $5.3 million for the same period in 2016, net sales during the quarter decreased 2.9% or $2.8 million. Domestic sales, excluding PCCP, decreased 5.8% or $3.6 million while international sales increased 2.6% or $0.8 million compared to the same period in 2016.

Sales in our larger water markets, excluding PCCP, decreased 4.0% or $2.6 million in the first quarter of 2017 compared to the first quarter of 2016. Sales in the construction market increased $1.1 million due primarily to sales for rental market customers and sales of repair parts increased $1.0 million. Sales in the municipal market, excluding PCCP, decreased $1.9 million driven by decreased shipments attributable to other flood control projects and sales in the fire protection market decreased $1.6 million principally due to lower domestic sales. Also, sales in the agriculture market decreased $1.3 million due to wet weather conditions in some key domestic locations and low farm income.

Sales decreased 0.6% or $0.2 million innon-water markets during the first quarter of 2017 compared to the first quarter of 2016. Sales in the industrial market increased $1.7 million driven by an increase in oil and gas drilling activity and sales in the OEM market increased $0.8 million driven by infrastructure spending relating to gas production. These increases were offset by decreased shipments of $2.6 million in the petroleum market driven by challenging market conditions.

Cost of Products Sold and Gross Profit

Gross profit was $21.2 million for the first quarter of 2017, resulting in gross margin of 22.9%, compared to gross profit of $22.9 million and gross margin of 22.8% for the same period in 2016. Gross margin includes anon-cash pension settlement charge of $1.1 million or 110 basis points in the first quarter of 2017 which did not occur in the first quarter of 2016. Excluding thenon-cash pension settlement charge, the 120 basis point increase in gross margin was due principally to favorable sales mix. Offsetting the sales mix benefit was a 60 basis point increase in healthcare expenses and an increase in overhead expenses as a percent of sales driven by lower leverage due to sales volume decreases.

Selling, General and Administrative Expenses (SG&A)

The increase in Selling, general and administrative expense (“SG&A expenses as a percentage&A”) was $14.2 million for the first quarter of 2017 and 15.3% of net sales, in the first halfcompared to $13.7 million and 13.6% of 2016 compared tonet sales for the same period in 2015 was due principally to lower sales volume and increased professional services of approximately 34 basis points related largely to costs incurred in connection with recently acquired businesses. Offsetting these increases was lower pension expense primarily because of2016. SG&A includes anon-cash pension settlement charge of 30$0.6 million or 70 basis points fromin the first halfquarter of 20152017 which did not recur in the same period in 2016 and lower advertising expense of approximately 14 basis points due to participation in fewer trade shows during 2016.

Net Income

The decreases in net income and earnings per shareoccur in the first halfquarter of 2016 compared to the same period in 2015 were due primarily to major market sales mix changes and lower sales volume. The decrease in the effective tax rate between the two periods is due primarily to a research and development tax credit being in effect in the first half of 2016 but not in the first half of 2015, changes in the estimated domestic production activities deduction and the impact of more income in jurisdictions with lower tax rates.

Liquidity and Capital Resources

Cash and cash equivalents totaled $49.5 million and there was no outstanding bank debt at June 30, 2016. In addition, the Company had $24.0 million available in bank lines of credit after deducting $7.0 million in outstanding letters of credit primarily related to customer orders. The Company has continually been in compliance with its nominal restrictive covenants, such as limits on additional borrowings and maintenance of certain operating and financial ratios, including at June 30, 2016.

PART I – CONTINUED

The 100 basis point increase in SG&A as percent of sales, excluding thenon-cash pension settlement charge, was due principally to loss of leverage due to lower sales volume and a 40 basis point increase in travel and advertising expense due to participation in trade shows. Excluding thenon-cash pension settlement charge, SG&A decreased slightly compared to the same period last year.

Operating Income

The decline in operating income and operating margin were impacted by the variances mentioned above, most notably anon-cash pension settlement charge totaling $1.7 million or 180 basis points in the first quarter of 2017 which did not occur in the first quarter of 2016. The decline in operating margin was further impacted by loss of leverage due to lower sales volume.

Net Income

The decrease in net income in the first quarter of 2017 compared to the first quarter of 2016 was due primarily to lower sales volume and anon-cash pension settlement charge in the first quarter of 2017 of $1.1 million, net of income taxes. The decrease in the effective tax rate between the two periods was due primarily to the impact of more income in foreign jurisdictions with lower tax rates. Anon-cash pension settlement charge decreased the first quarter of 2017 earnings by $0.04 per share.

Liquidity and Capital Resources

Cash and cash equivalents totaled $60.5 million and there was no outstanding bank debt at March 31, 2017. In addition, the Company had $24.1 million available in bank lines of credit after deducting $6.9 million in outstanding letters of credit primarily related to customer orders. The Company was in compliance with its debt covenants, including limits on additional borrowings and maintenance of certain operating and financial ratios, at March 31, 2017 and December 31, 2016.

Working capital increased $9.8$6.0 million from December 31, 20152016 to a record $155.7$160.6 million at June 30, 2016.March 31, 2017. The increase in working capital was due principally to higher cash partially offset by lower inventoriesbalances and increased accounts receivable.

Free cash flow, anon-GAAP measure for reporting cash flow, is defined by the Company as adjusted earnings before interest, income taxes and depreciation and amortization, less capital expenditures and dividends. The Company believes free cash flow provides investors with an important perspective on cash available for investments, acquisitions and working capital requirements.

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The following table reconciles adjusted earnings before interest, income taxes and depreciation and amortization as reconciled above to free cash flow:

Financial Cash Flow

The primary drivers of operating cash flows during the first six monthsquarter of 20162017 were operating income, reduced inventories and reduced prepaid income taxes, partially offset by increased accounts receivable. During this same period in 2016, operating cash flows were primarily driven by reduced inventories, lower estimated income tax payments and lower commissions payable driven by product mix partially offset by $6.0 million of contributions to the pension plan. During this same period in 2015, operating cash flows were primarily driven by net earnings during the period combined with non-cash charges relating to depreciation and amortization and pension expense, offset by changes in working capital.higher accounts payable.

During the first six monthsquarter of 2016,2017, investing activities of $2.5$2.0 million primarily consisted of capital expenditures for machinery and equipment and building improvements. Net capitalequipment. Capital expenditures for 2016, consisting principally of machinery and equipment and building improvements,the full-year 2017 are currently estimatedpresently planned to be in the range of $7$8 to $10 million and are expected to be principally financed through internally generatedinternally-generated funds. During the first six monthsquarter of 2015,2016, cash used in investing activities of $4.1 millionprimarily consisted primarily of capital expenditures for machinery and equipment and building improvements.

Net cash used for financing activities for the first six monthsquarter of 2017 and 2016 consisted of dividend payments of $5.5 million. During the first six months of 2015, financing activities consisted of dividend payments of $5.3$3.0 million and re-payment of $6.0$2.7 million, in short-term debt. The ratio of current assets to current liabilities was 4.3 to 1 at June 30, 2016 and 4.4 to 1 at December 31, 2015.respectively.

On July 28, 2016,April 27, 2017, 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 SeptemberJune 9, 2016,2017, to shareholders of record AugustMay 15, 2016.2017. This will mark the 266th269th consecutive quarterly dividend paid by The Gorman-Rupp Company.

The Company currently expects to continue its distinguishedexceptional 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, 20152016 contained in our Fiscal 2015 Annual Report on Form 10-K.10-K for the year ended December 31, 2016. 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 Form10-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.

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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 Form10-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, changesenvironment; (2) highly competitive markets; (3) availability of raw materials; (4) loss of key management; (5) cyber security threats; (6) acquisition performance and integration; (7) compliance with, and costs related to, a variety of import and export laws and regulations; (8) environmental compliance costs and liabilities; (9) exposure to fluctuations in foreign currency exchange rates, commodity pricing and capital and consumer 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, including taxes; (5) stable governments and businessrates; (10) conditions in emerging economies; (6) successful penetration of emerging economies; (7) unforeseen delays or disruptionsforeign countries in which the Company conducts business; (11) impairment in the remaining PCCP project,value of intangible assets, including any further revisions to the timinggoodwill; (12) defined benefit pension plan settlement expense; (13) family ownership of shipments for the project; (8) continuation of the favorable environment to make acquisitions, domesticcommon equity; and foreign, including regulatory requirements and market values of potential candidates and our ability to successfully integrate and realize the

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anticipated benefits of completed acquisitions; and (9)(14) 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 is subject to market risk associated principally with changes in foreign currency exchange rates. The Company’s foreign operations do not involve material risks duecurrency exchange rate risk is limited primarily to their relative size, both individuallythe Euro, Canadian Dollar, South African Rand and collectively. Approximately 90% of the Company’s sales are domiciled within or originated from the United States.British Pound. The Company is not exposed to material market risksmanages its foreign exchange risk principally through invoicing customers in the same currency as a resultthe source of its diversified export sales. Export sales generallyproducts. The foreign currency transaction gains (losses) for the first quarter of 2017 and the first quarter of 2016 were $0.2 million and $(0.1) million, respectively, and are denominated in U.S. Dollarsreported within Other income and madeOther expense on open account or under lettersthe Consolidated Statements of credit.Income.

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 Form10-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 June 30, 2016.March 31, 2017.

Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting that occurred during the last fiscal quarter 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 Form10-K for the fiscal year ended December 31, 2015.2016.

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There are no material changes from the risk factors previously reported in the Company’s Annual Report on Form10-K for the fiscal year ended December 31, 2015.