The Gorman-Rupp Company

Three Months Ended March 31, 2022 and nine months ended September 30, 2017 and 20162021

PART I. FINANCIAL INFORMATION

ITEM 1—1 - FINANCIAL STATEMENTS (UNAUDITED)

THE GORMAN-RUPP COMPANY

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

See notes to consolidated financial statements (unaudited).

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

See notes to consolidated financial statements (unaudited).

THE GORMAN-RUPP COMPANY

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

See notes to consolidated financial statements (unaudited).

THE GORMAN-RUPP COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

See notes to consolidated financial statements (unaudited).

THE GORMAN-RUPP COMPANY

PART ICONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)

See notes to consolidated financial statements (unaudited).

(Amounts in tables in thousands of dollars)dollars, except for per share amounts)

NOTE 1 - BASIS OF PRESENTATION OF FINANCIAL STATEMENTS

The accompanying unaudited consolidated financial statementsConsolidated 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-Q10-Q and do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The consolidated financial statementsConsolidated Financial Statements include the accounts of The Gorman-Rupp Company (the “Company” or “Gorman-Rupp”) and its wholly-ownedwholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results. In the opinion of management of the Company, all adjustments considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2017 March 31, 2022 are not necessarily indicative of results that may be expected for the year ending December 31, 2017.2022. For further information, refer to the consolidated financial statementsConsolidated Financial Statements and accompanying notes thereto included in the Company’s Annual Report on Form 10-K10-K for the year ended December 31, 2016,2021, from which related information herein has been derived.

COVID-19 Impact

In March 2020, the World Health Organization categorized the coronavirus (“COVID-19”) as a pandemic. While the near-term effects of the pandemic have negatively impacted our financial results, uncertainty over the economic and operational impacts of COVID-19 means the ultimate related financial impact cannot be reasonably estimated at this time. The Company’s Consolidated Financial Statements presented herein reflect estimates and assumptions made by management that affect the reported amounts of assets and liabilities and reported amounts of revenue and expenses during the reporting periods presented. Such estimates and assumptions affect, among other things, the Company’s goodwill, long-lived asset and indefinite-lived intangible asset valuation; inventory valuation; the allowance for doubtful accounts; and pension plan assumptions. The Company is not aware of any specific event or circumstance that would require an update to its estimates or judgments or a revision of the carrying value of its assets or liabilities as of the date of the financial statements included in this Quarterly Report on Form 10-Q. These estimates may change as new events occur and additional information is obtained.

NOTE 2 - RECENTLY ISSUED ACCOUNTING STANDARDS

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

In March 2017, the FASB issued ASU No. 2017-07, “Compensation

NOTE 3– Retirement Benefits (Topic 715) – Improving the Presentation REVENUE

Disaggregation of Net Periodic Pension CostRevenue

The following tables disaggregate total net sales by major product category and Net Periodic Postretirement Benefit Cost,” which provides additional guidance on the presentationgeographic location:

International sales represented approximately 29% and 30% of total net periodic pension and postretirement benefit costs in the income statement and on the components eligible for capitalization. The amendments in this ASU require that an employer report the service cost component of the net periodic benefit costs in the same income statement line item as other compensation costs arising from services rendered by employees during the period. The non-service-cost components of net periodic benefit costs are to be presented in the income statement separately from the service cost components and outside a subtotal of income from operations. The ASU also allowssales for the capitalizationfirst quarter of 2022 and 2021, respectively, and were made to customers in many different countries around the service cost components, when applicable (i.e.,world.

On March 31, 2022, the Company had $195.5 million of remaining performance obligations, also referred to as a cost of internally manufactured inventory or a self-constructed asset). The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017 and early adoption is permitted. The amendments in this ASU are to be applied retrospectively. The adoption of ASU 2017-07 will result in a change within operating income with a corresponding change in other income (expense), net to reflect the impact of presenting all components of net benefit cost, except for service cost, outside of operating income. See Note 6 for the components of the Company’s net benefit costs.backlog. The Company does not expect the adoptionexpects to recognize as revenue substantially all of ASU-2017-07 to have a material impact on its consolidated financial statements.remaining performance obligations within one year.

In January 2017, the FASB issued ASU No. 2017-04, “Intangibles – Goodwill and Other (Topic 350) – Simplifying the Test for Goodwill Impairment,” which eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. 

The ASU is effective for impairment tests performed in fiscal years, and interim periods within those years, beginning after December 15, 2019 and early adoption is permitted. The amendments in this ASU are to be applied on a prospective basis. The Company early adopted this new guidance during the three months ended September 30, 2017. The Company concluded that ASU 2017-04 is preferable to the current guidance due to efficiency, since ASU 2017-04 eliminates the requirement to determine the fair value of individualCompany’s contract assets and liabilities as of a reporting unit to measure goodwill impairment. The Company believesMarch 31, 2022 and December 31, 2021 were as follows:

Revenue recognized for the adoption of ASU 2017-04 did not change the amount of impairment charges recordedthree months ended March 31, 2022 and 2021 that was included in the third quarter of 2017. See Note 8 – Impairment Charges for additional information on our interim goodwill and other intangible asset impairment tests performed.

In February 2016,contract liabilities balance at 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 U.S. GAAP. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018 and early adoption is permitted. The Company currently does not expect the adoption of ASU 2016-02 will have a material impact on its consolidated financial statements as its future minimum lease commitments are not material.

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” which supersedes most current revenue recognition guidance, including industry-specific guidance, and requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. Subsequent accounting standards updates have been issued, which amend and/or clarify the application of ASU 2014-09. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The Company is still finalizing its assessment of this ASU, but it does not currently expect it to have a material impact on its consolidated financial statements. Based on the evaluation of its current revenue streams and contracts, most will be recorded consistently under both the current and new standard. The Company has determined it will use the modified retrospective method as its transition method in the adoption of the new revenue standard. The Company will continue to accumulate information that will be necessary for implementationperiod was $5.1 million and to identify and implement any changes needed to processes and controls to meet the ASU’s updated reporting and disclosure requirements. The Company will continue its evaluation of this new guidance through the date of adoption.$3.8 million, respectively.

NOTE 34 - INVENTORIES

Inventories

LIFO inventories are stated at the lower of cost or market. The costs for approximately 72%market and all other inventories are stated at the lower of inventories at September 30, 2017 and December 31, 2016 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.cost or net realizable value. Replacement cost approximates current cost and the excess over LIFO cost wasis approximately $59.7$71.9 million and $58.4$70.1 million at September 30, 2017 March 31, 2022 and December 31,2021, respectively. Allowances for excess and obsolete inventory totaled $6.1 million and $6.0 million at March 31, 2016,2022 and December 31,2021, respectively. An actual valuation of inventory under the LIFO method is made at the end of each year based on the inventory levels and costs at that time. Interim LIFO calculations are based on management’s estimate of expected year-end inventory levels and costs, and are subject to the final year-end LIFO inventory valuation.

Allowances for excess and obsolete inventory totaled $4.9 million and $4.5 million at September 30, 2017 and December 31, 2016, respectively.

The major componentsInventories are comprised of net inventories are as follows:the following:

NOTE 4 -5– PROPERTY, PLANT AND EQUIPMENT

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

NOTE 56 - 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 costCost of products sold. Changes in the Company’s product warrantywarranties liability are:

NOTE 67 - PENSION AND OTHER POSTRETIREMENT BENEFITS

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

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

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

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

		Pension Benefits								Postretirement Benefits
		Nine Months Ended September 30,								Nine Months Ended September 30,
		2017				2016				2017				2016
Service cost		$	2,078			$	2,127			$	937			$	894
Interest cost			1,918				1,981				610				631
Expected return on plan assets			(3,525	)			(2,947	)			—				—
Recognized actuarial loss (gain)			1,384				1,576				(505	)			(523	)
Settlement loss			3,841				—				—��				—
Net periodic benefit cost		$	5,696			$	2,737			$	1,042			$	1,002

NOTE 7 -8– ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following table summarizes reclassifications out of accumulatedAccumulated other comprehensive income (loss): as reported in the Consolidated Statements of Income are:

The following tables summarize changes in balances for each componentcomponents of accumulatedAccumulated other comprehensive income (loss): as reported in the Consolidated Balance Sheets are:

NOTE 9– COMMON SHARE REPURCHASES

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

NOTE 8 – IMPAIRMENT CHARGES

The decreasing demandCompany has a share repurchase program with the authorization to purchase up to $50.0 million of the Company’s common shares. During the three-month period ended March 31, 2022 the Company repurchased 24,546 shares for barge pumps for the marine transportation market, driven by low oil prices and overcapacity of inland barges, has continued to negatively affect the Bayou City Pump Company (“Bayou”) reporting unit, leading management to reconsider its estimates for future profitability of this reporting unit$0.9 million. NaN shares were repurchased during the thirdthree-month period ending March 31, 2021. As of March 31, 2022, the Company had $48.1 million available for repurchase under the share repurchase program.

NOTE 10– SUBSEQUENT EVENTS

On April 26, 2022 the Company entered into a definitive agreement to acquire the assets of Fill-Rite and Sotera (“Fill-Rite”), a division of Tuthill Corporation, for $525 million. When adjusted for approximately $80 million in expected tax benefits, the net transaction value is approximately $445 million. The Company expects to fund the transaction with cash on-hand and new debt. Subject to customary closing conditions and necessary regulatory approvals, the transaction is expected to close in the second quarter of 2017 and thereby increasing the likelihood that the associated goodwill and other intangible assets could be impaired. As such, the Company performed an interim discounted cash flow analysis to test for potential impairment of goodwill pursuant to ASU 2017-04 and performed a recoverability test related to Bayou’s customer relationship intangible asset. As a result of these impairment tests, the Company concluded that the goodwill and customer relationships were impaired and recorded non-cash impairment charges of $0.9 million and $3.2 million, respectively, which represented the full remaining amounts of both of these intangible assets. These impairment charges are included in Impairment of goodwill and other intangible assets on the Condensed Consolidated Statements of Income.2022.

(Amounts in tablesDollars in thousands, except for per share amounts)

The following discussion and analysis of dollars)the Company’s financial condition and Results of Operations should be read in conjunction with the Consolidated Financial Statements, and notes thereto, and the other financial data included elsewhere in this Quarterly Report on Form 10-Q. The following discussion should also be read in conjunction with the Company’s audited Consolidated Financial Statements and accompanying notes, and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in its Annual Report on Form 10-K for the year ended December 31, 2021. The coronavirus (COVID-19) pandemic had an adverse effect on the Company’s reported results in 2021 and while our supply chains continue to face challenges our reported results have continued to improve. The extent to which the Company’s operations will continue to be impacted by the pandemic will depend largely on future developments, which are highly uncertain and cannot be accurately predicted, including new information which may emerge concerning the severity of the pandemic and actions by government authorities to contain the pandemic or treat its impact, among other things.

Executive Overview

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

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

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

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

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

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

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

Gross profit was $26.2 million for the third quarter of 2017, resulting in gross margin of 27.9%, compared to gross profit of $22.7 million and gross margin of 24.8% for the same period in 2016. Gross margin included a non-cash pension settlement charge of $0.3 million or 30 basis points in the third quarter of 2017 which did not occur in the third quarter of 2016. Excluding the non-cash pension settlement charge, the 340 basis point increase in gross margin was largely driven by favorable sales mix and lower manufacturing overhead expenses.

Selling, general and administrative expense (“SG&A”) was $14.2 million and 15.2% of net sales for the third quarter of 2017 compared to $12.8 million and 14.0% of net sales for the same period in 2016. SG&A included a non-cash pension settlement charge of $0.1 million or 20 basis points in the third quarter of 2017. SG&A included a gain on the sale of property, plant and equipment of $1.0 million or 110 basis points in the third quarter of 2016. Excluding these items, SG&A as a percentage of sales improved 10 basis points due principally to higher sales volume.

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

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

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

Net sales for the nine months ended September 30, 2017 were $284.5 million compared to $287.9 million during the same period in 2016, a decrease of 1.2% or $3.4 million. Excluding sales from the PCCP project of $0.8 million in the first nine months of 2017 and $9.5 million for the same period in 2016, net sales for the first nine months of 2017 increased 1.9% or $5.3 million. Domestic sales, excluding PCCP, increased by 0.1% or $0.2 million while international sales increased 5.2% or $5.1 million compared to the same period in 2016.

Gross profit was $73.5 million for the first nine months of 2017, resulting in gross margin of 25.9%, compared to gross profit of $68.8 million and gross margin of 23.9% for the same period in 2016. Gross margin included a non-cash pension settlement charge ofCompany’s cash position decreased $2.5 million or 90 basis points in the first nine months of 2017 which did not occur in the first nine months of 2016. Excluding the non-cash pension settlement charge, gross margin increased by 290 basis points due principally to favorable sales mix, labor efficiency and lower warranty expense.

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

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

Net income was $18.6 million during the first ninethree months of 2017 compared2022 to $19.8$123.0 million at March 31, 2022 and the Company generated $12.5 million in adjusted earnings before interest, taxes, depreciation and amortization during the first nine months of 2016, and earnings per share were $0.71 and $0.76 for the respective periods. Earnings per sharesame period.

Capital expenditures for the first ninethree months of 2017 included non-cash impairment charges2022 were $3.5 million and consisted primarily of $0.10 per share and a non-cash pension settlement charge of $0.10 per share. Conversely, the first nine months of 2016 included a gain on the sale of property, plantmachinery and equipment and building improvements. Capital expenditures for the full-year 2022 are presently planned to be in the range of $0.03 per share.$15-$20 million primarily for building improvements and machinery and equipment purchases, and are expected to be financed through internally-generated funds.

The Company’s backlog of orders was $111.4$195.5 million at September 30, 2017March 31, 2022 compared to $102.8$125.5 million at September 30, 2016March 31, 2021 and $98.8$186.0 million at December 31, 2016. Excluding the PCCP project in 2016, the backlog at September 30, 20172021. Incoming orders increased 9.6% asfor the first quarter of 2022 compared to September 30, 2016.the same period in 2021. Incoming orders were up across most markets the Company serves.

On October 26, 2017,April 28, 2022, the Board of Directors authorized the payment of a quarterly dividend of $0.125$0.17 per share on the common stock of the Company, payable December 8, 2017,June 10, 2022, to shareholders of record November 15, 2017. The cash dividend will represent an 8.7% increase over the dividend paid in the previous quarter.as of May 13, 2022. This will mark the 271st289th consecutive quarterly dividend paid by The Gorman-Rupp Company.

On April 26, 2022, the Company entered into a definitive agreement to acquire the assets of Fill-Rite, a division of Tuthill Corporation, for $525 million. When adjusted for approximately $80 million in expected tax benefits, the net transaction value is approximately $445 million.  The Company expects to fund the transaction with cash on-hand and new debt.  Subject to customary closing conditions and necessary regulatory approvals, the 45th consecutive yeartransaction is expected to close in the second quarter of increased dividends paid2022.  In connection with the anticipated closing of the transaction, the Company expects to its shareholders.enter into senior secured first lien credit facilities comprised of a $350 million term loan facility and a $100 million revolving credit facility, as well as an unsecured senior subordinated term loan facility in the amount of $90 million, subject to the satisfaction or waiver of customary conditions. The dividend yield at September 30, 2017 was 1.4%.Company expects that it will incur no initial borrowings under the revolving credit facility in connection with anticipated closing of the transaction.

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

We continue to see top line growth across most of our markets and foreign uncertainties, including instability related to the production and price of oil and low commodity prices have made 2017 challenging. In addition, with the completion of the PCCP project, comparisons of revenue with 2016 will need to be appropriately adjusted during 2017. Overall business conditions have continued to improve and we are optimistic about our incoming order rate. We are also encouraged to see capital spending increase in industries related to oiltrends remain positive.  Although backlog is still at a historically high level, our aging is consistent.   While we have leveraged labor and gas drilling activity and are hopeful the momentum is sustainable. The Company remains focusedoverhead, inflationary pressures on operational efficiencies andcost of material persist, so we will continue to manage expenses closely. Our underlying fundamentals remain strongadjust our pricing to offset these increases.   It appears that global supply chain challenges will extend into the foreseeable future.  We are navigating these challenges and believe we remain well positionedwill be able to drive long-termmaintain top line growth. Our strong balance sheet provides us with the flexibility to continue to evaluate acquisition opportunities and new product development that we expect will help add value to our operations over the longer-term.

Three Months Ended September 30, 2017March 31, 2022 vs. Three Months Ended September 30, 2016March 31, 2021

Net Sales

Net sales duringfor the thirdfirst quarter of 20172022 were $94.0$102.2 million compared to $91.3net sales of $89.0 million duringfor the thirdfirst quarter of 2016,2021, an increase of 2.9%14.8% or $2.6 million. Excluding sales from the New Orleans Permanent Canal Closures & Pumps (“PCCP”) project of $0.3 million in the third quarter of 2017 and $1.6 million for the same period in 2016, net sales increased 4.4% or $4.0$13.2 million. Domestic sales excluding PCCP,of $72.4 million increased 3.5% or $2.0 million while15.6% and international sales of $29.8 million increased 6.0% or $2.0 million12.8% compared to the same period in 2016.2021. Sales have increased across nearly all of our markets and incoming orders for the quarter increased 9.6% compared to the first quarter of 2021 to $112.0 million.

Sales in our larger water markets excluding PCCP, decreased 2.2%increased 11.5% or $1.4$7.5 million in the thirdfirst quarter of 20172022 compared to the thirdfirst quarter of 2016.2021. Sales in the construction market increased $2.6$5.9 million due primarily to sales to rental market customers related to increased oil and gas drilling activity. This increase was offset by decreased sales in the municipal market of $2.2 million primarily driven by decreased shipments attributable to flood control projects, clean water and wastewater applications. In addition, sales in the fire protection market, decreased $1.8$2.3 million due principally to market softness in the Middle East.

Sales increased 21.7% or $5.4construction market, and $1.6 million in non-waterthe repair market. Partially offsetting these increases was a decrease of $2.2 million in the municipal market and $0.1 million in the agriculture market. Incoming orders and backlog for the municipal and agriculture markets during the third quarter of 2017were up compared to the thirdprior year period.

Sales in our non-water markets increased 23.3% or $5.7 million in the first quarter of 2016.2022 compared to the first quarter of 2021. Sales increased $3.7 million in the industrial and petroleum markets increased a combined $3.2market, $1.7 million principally attributable to increased capital spending related to oil and gas drilling activity. Sales in the OEM market, increased $2.2and $0.3 million primarily related to power generation equipment and services.in the petroleum market.

Cost of Products Sold and Gross Profit

Gross profit was $26.2 million for the third quarter of 2017, resulting in gross margin of 27.9%, compared to gross profit of $22.7 million and gross margin of 24.8% for the same period in 2016. Gross margin included a non-cash pension settlement charge of $0.3 million or 30 basis points in the third quarter of 2017 which did not occur in the third quarter of 2016. Excluding the non-cash pension settlement charge, the 340 basis point increase in gross margin was largely driven by favorable sales mix and lower manufacturing overhead expenses.

Selling, General and Administrative Expenses (SG&A)

SG&A was $14.2 million and 15.2% of net sales for the third quarter of 2017 compared to $12.8 million and 14.0% of net sales for the same period in 2016. SG&A included a non-cash pension settlement charge of $0.1 million or 20 basis points in the third quarter of 2017. SG&A included a gain on the sale of property, plant and equipment of $1.0 million or 110 basis points in the third quarter of 2016. Excluding these items, SG&A as a percentage of sales improved 10 basis points due principally to higher sales volume.

Operating Income

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

Net Income

The decrease in net income in the third quarter of 2017 compared to the third quarter of 2016 was due primarily to increased sales and gross margin offset by non-cash impairment charges in the third quarter of 2017 of $2.7 million, net of income taxes, and a non-cash pension settlement charge of $0.3 million, net of income taxes. The decrease in the effective tax rate between the two periods was due primarily to the impact of lower income in domestic jurisdictions with higher tax rates driven by the goodwill and other intangible asset impairment charges.

Earnings per share for the third quarter of 2017 included non-cash impairment charges of $0.10 per share and a non-cash pension settlement charge of $0.01 per share. Conversely, the third quarter of 2016 included a gain on the sale of property, plant and equipment of $0.03 per share.

Nine Months Ended September 30, 2017 vs. Nine Months Ended September 30, 2016

Net Sales

Net sales for the nine months ended September 30, 2017 were $284.5 million compared to $287.9 million during the same period in 2016, a decrease of 1.2% or $3.4 million. Excluding sales from the PCCP project of $0.8 million in the first nine months of 2017 and $9.5 million for the same period in 2016, net sales for the first nine months of 2017 increased 1.9% or $5.3 million. Domestic sales, excluding PCCP, increased by 0.1% or $0.2 million while international sales increased 5.2% or $5.1 million compared to the same period in 2016.

Sales in the first nine months of 2017 in our larger water markets, excluding PCCP, decreased 0.3% or $0.7 million compared to the first nine months of 2016. Sales in the construction market increased $7.2 million due primarily to sales to rental market customers, and sales of repair parts increased $1.8 million. Sales in the fire protection market decreased $5.1 million principally due to market softness domestically and in the Middle East, and sales in the agriculture market decreased $1.6 million principally due to low farm income and competitive pricing pressure. Sales in the municipal market decreased $3.0 million principally driven by decreased shipments attributable to flood control projects.

Sales in the first nine months of 2017 in our non-water markets increased 7.2% or $6.0 million compared to the first nine months of 2016. Sales increased $5.4 million in the industrial market driven by an increase in oil and gas drilling activity. Sales in the OEM market increased $2.6 million primarily related to power generation equipment and services and infrastructure spending driven by gas production. These increases were partially offset by decreased shipments of $2.0 million in the petroleum market driven by challenging market conditions.

Cost of Products Sold and Gross Profit

Gross profit was $73.5$25.5 million for the first nine monthsquarter of 2017,2022, resulting in gross margin of 25.9%25.0%, compared to gross profit of $68.8$23.0 million and gross margin of 23.9%25.9% for the same period in 2016. Gross margin included a non-cash pension settlement charge of $2.5 million or2021. The 90 basis pointspoint decrease in the first nine months of 2017 which did not occur in the first nine months of 2016. Excluding the non-cash pension settlement charge, gross margin increasedwas driven by 290 basis points due principally to favorable sales mix, labor efficiency and lower warranty expense. Offsetting these benefits was a 25200 basis point increase in healthcare expenses.cost of material, which included an unfavorable LIFO impact of 100 basis points, partially offset by a 110 basis point improvement from labor and overhead leverage due to increased sales volume.

Selling, General and Administrative Expenses (SG&A) Expenses

Selling, general and administrative (“SG&A was $43.1&A”) expenses were $16.0 million and 15.2%15.7% of net sales for the first nine monthsquarter of 20172022 compared to $40.2$14.1 million and 14.0%15.8% of net sales for the same period in 2016.2021. SG&A includedexpenses increased 14.0% or $1.9 million as a non-cash pension settlement chargeresult of $1.3 million or 50 basis points in the first nine months of 2017 which did not occur in the same period last year.increased payroll and payroll related costs and increased travel expenses. SG&A included a gain on the sale of property, plant and equipment of $1.0 million or 40 basis points in the first nine months of 2016. Excluding these items, SG&Aexpenses as a percentage of sales increased 30improved 10 basis points due principally to lowerprimarily as a result of leverage on fixed costs from increased sales volume.

Operating Income

Operating income was $26.3$9.5 million for the first quarter of 2022, resulting in an operating margin of 9.3% for the first nine months of 2017,, compared to operating income of $28.6$9.0 million and operating margin of 9.9%10.1% for the same period in 2016. In the first nine months of 2017, operating2021. Operating margin included non-cash impairment charges of $4.1 million or 140decreased 80 basis points andprimarily as a non-cash pension settlement chargeresult of $3.8 million or 140 basis points. In the first nine monthsincreased cost of 2016, operating margin included a gainmaterial due to unfavorable LIFO adjustments partially offset by improved leverage on the sale of property, plant and equipment of $1.0 million or 30 basis points. Excluding these items, operating margin improved 250 basis points due principally to favorablefixed costs from increased sales mix, and lower labor and manufacturing overhead costs.volume.

Net Income