The Gorman-Rupp Company

Three Months Ended March 31, 2023 and nine months ended September 30, 2017 and 20162022

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-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, 2017March 31, 2023 are not necessarily indicative of results that may be expected for the year ending December 31, 2017.2023. 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-K for the year ended December 31, 2016,2022, from which related information herein has been derived.

NOTE 2 - RECENTLY ISSUED ACCOUNTING STANDARDSACQUISITIONS

On May 31, 2022, the Company acquired the assets of Fill-Rite and Sotera (“Fill-Rite”), a division of Tuthill Corporation, for cash consideration of $528.0 million. The transaction was funded with new debt consisting of $350.0 million from a senior secured term loan, $90.0 million from a subordinated unsecured loan, $5.0 million from the new revolving Credit Facility, and $83.0 million of cash on hand. Refer to “Note 10 – Financing Arrangements” for further details related to the financing completed as part of the transaction.

The Company considersaccounted for the applicabilityFill-Rite transaction in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805 “Business Combinations”. The results of operations for Fill-Rite are included in the accompanying Consolidated Statements of Income from the acquisition date. Fill-Rite had $40.0 million in net sales and impact of all Accounting Standard Updates (“ASUs”). ASUs not listed below were assessed and determined either to be not applicable or are expected to have minimal impact on$4.3 million in operating income included in the Company’s consolidated financial statements.statements for the three months ended March 31, 2023. Operating income for the three months ended March 31, 2023 included $0.6 million of acquired customer backlog amortization and $3.0 million in amortization on customer relationships and developed technology.

In March 2017,

Under the FASB issued ASU No. 2017-07, “Compensation – Retirement Benefits (Topic 715) – Improvingacquisition method of accounting, the Presentation of Net Periodic Pension Costassets 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 componentliabilities have been recorded at their respective estimated fair values as of the net periodic benefit costs indate of completion of the same income statement line item as other compensation costs arising from services rendered by employeesacquisition and reported into the Company’s Consolidated Balance Sheets. These preliminary estimates may be revised during the period. The non-service-cost components of net periodic benefit costsmeasurement period as third-party valuations are to be presented in the income statement separately from the service cost componentsfinalized, additional information becomes available 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,additional analyses are performed, 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. The Company does not expect the adoption of ASU-2017-07 tothese differences could have a material impact on its consolidatedour results of operations and financial statements.position.

In January 2017,

The following table presents 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 impliedpreliminary fair value of assets acquired and liabilities assumed and will be finalized pending completion of purchase accounting matters. No adjustments to the preliminary purchase price allocation were made during the first quarter of 2023:

For tax purposes, the Fill-Rite acquisition was treated as an asset purchase. As such, the Company received a step-up in tax basis of the net Fill-Rite assets, equal to the purchase price, including goodwill which is deductible for tax purposes.

The following is supplemental pro-forma net sales, operating income, net income, and earnings per share had the Fill-Rite acquisition occurred as of January 1, 2021 (in millions):

The supplemental pro forma information presented above is being provided for information purposes only and may not necessarily reflect the future results of operations of the Company or what the results of operations would have been had the Company owned and operated Fill-Rite since January 1, 2021. There were no material non-recurring pro-forma adjustments present.

NOTE 3 – REVENUE

Disaggregation of Revenue

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

International sales represented approximately 25% and 29% of total net sales for the first quarter of 2023 and 2022, respectively, and were made to measure a goodwill impairment charge. Instead, entities will record an impairment charge based oncustomers in many different countries around the excessworld.

On March 31, 2023, the Company had $270.6 million 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 areremaining performance obligations, also referred to be applied on a prospective basis.as backlog. The Company early adopted this new guidance duringexpects to recognize as revenue substantially all of its remaining performance obligations within one year.

The Company’s contract assets and liabilities as of March 31, 2023 and December 31, 2022 were as follows:

Revenue recognized for the three months ended September 30, 2017. The Company concludedMarch 31, 2023 and 2022 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 individual assets and liabilities of a reporting unit to measure goodwill impairment. The Company believes the adoption of ASU 2017-04 did not change the amount of impairment charges recordedwas 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 $2.4 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.$5.1 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$90.2 million and $58.4$88.2 million at September 30, 2017March 31, 2023 and December 31, 2016,2022, respectively. Allowances for excess and obsolete inventory totaled $7.3 million at March 31, 2023 and $7.2 million at December 31, 2022. 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

Pre-tax LIFO expense was $2.0 million and $4.5$1.8 million at September 30, 2017for the three months ended March 31, 2023 and December 31, 2016,2022, respectively.

The major components of net inventories are as follows:

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

The Company established a defined benefit pension plan for certain Fill-Rite employees (“Fill-Rite Plan”) upon the acquisition as of June 1, 2022. The activity is included in the tables within this footnote.

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

NOTE 9 – COMMON SHARE REPURCHASES

The Company has a share repurchase program with the authorization to purchase up to $50.0 million of the Company’s common shares. As of March 31, 2023, the Company had $48.1 million available for repurchase under the share repurchase program. During the three-month period ending March 31, 2023 the Company repurchased 36,105 shares at an average cost per share of $28.51 for a total of $1.0 million in the surrender of common shares to cover taxes in connection with the vesting of stock awards. During the three-month period ending March 31, 2022 the Company repurchased 24,546 shares at an average cost per share of $37.39 for a total of $0.9 million.

NOTE10 – FINANCING ARRANGEMENTS

The carrying value of long term debt, including the current portion, approximates fair value as the variable interest rates approximate rates available to other market participants with comparable credit risk.

Senior Secured Credit Agreement

On May 31, 2022, the Company entered into a Senior Secured Credit Agreement with several lenders, which provides a term loan of $350.0 million (“Senior Term Loan Facility”) and a revolving credit facility up to $100.0 million (“Credit Facility”). The Credit Facility has a letter of credit sublimit of up to $15.0 million, as a sublimit of the Credit Facility, and a swing line subfacility of up to $20.0 million, as a sublimit of the Credit Facility. The Company borrowed $5.0 million under the Credit Facility, which, along with the Senior Term Loan Facility, and cash-on-hand and the proceeds of the Subordinated Credit Facility described below, was used to purchase the assets of Fill-Rite as described in “Note 2 – Acquisitions”. The Company has agreed to secure all of its obligations under the Senior Secured Credit Agreement by granting a first priority lien on substantially all of its personal property, and each of Patterson Pump Company, AMT Pump Company, National Pump Company and Fill-Rite Company (collectively, the “Guarantors”) has agreed to guarantee the obligations of the Company under the Senior Secured Credit Agreement and to secure the obligations thereunder by granting a first priority lien in substantially all of such Guarantor’s personal property.

The Senior Secured Credit Agreement has a maturity date of May 31, 2027, with the Senior Term Loan Facility requiring quarterly installment payments commencing on September 30, 2022 and continuing on the last day of each consecutive December, March, June and September thereafter.

At the option of the Company, borrowings under the Senior Term Loan Facility and under the Credit Facility bear interest at either a base rate or at an Adjusted Term SOFR Rate, plus the applicable margin, which ranges from 0.75% to 1.75% for base rate loans and 1.75% to 2.75% for Adjusted Term SOFR Rate loans. The applicable margin is based on the Company’s senior leverage ratio. As of March 31, 2023, the applicable interest rate under the Senior Secured Credit Agreement was Adjusted Term SOFR plus 2.50%.

The Senior Secured Credit Agreement includes covenants subject to maximum leverage ratios and a minimum fixed charge coverage ratio. We were in compliance with all of our debt covenants as of March 31, 2023.

Subordinated Credit Agreement

On May 31, 2022, the Company entered into an unsecured subordinated credit agreement (“Subordinated Credit Agreement”) which provides for a term loan of $90.0 million (the “Subordinated Credit Facility”). Each of the Guarantors has agreed to guarantee the obligations of the Company under the Subordinated Credit Agreement. The proceeds from the Subordinated Credit Facility, along with cash-on-hand and the proceeds of the Senior Term Loan Facility described above, were used to purchase the assets of Fill-Rite as described in “Note 2 – Acquisitions”.

The Subordinated Credit Agreement has a maturity date of December 1, 2027. If the Subordinated Credit Facility is prepaid prior to the second anniversary, such prepayment must be accompanied by a make-whole premium. If the Subordinated Credit Facility is prepaid after the second anniversary but prior to the third anniversary, such prepayment requires a prepayment fee of 2%, and if the Subordinated Credit Facility is prepaid after the third anniversary but prior to the fourth anniversary, such prepayment requires a prepayment fee of 1%.

At the option of the Company, borrowings under the Subordinated Credit Facility bear interest at either a base rate plus 8.0%, or at an Adjusted Term SOFR Rate plus 9.0%. As of March 31, 2023 borrowings under the Subordinated Credit Facility bear interest at an Adjusted Term SOFR Rate plus 9.1%.

The Subordinated Credit Agreement includes covenants subject to maximum leverage ratios. We were in compliance with all of our debt covenants as of March 31, 2023.

Interest Rate Derivatives

The Company entered into interest rate swaps that hedge interest payments on its SOFR borrowing during the fourth quarter of 2022. All swaps have been designated as cash flow hedges. The following table summarizes the notional amounts, related rates and remaining terms of interest swap agreements as of March 31:

The fair value of the Company’s interest rate swaps was a payable of $2.8 million as of March 31, 2023. The fair value was based on inputs other than quoted prices in active markets for identical assets that are observable either directly or indirectly and therefore considered level 2. There were no interest rate swaps in place as of March 31, 2022. The mark-to-market effect of interest rate swap agreements that are considered effective as hedges has been included in Accumulated Other Comprehensive Loss. The interest rate swap agreements held by the Company on March 31, 2023 are expected to continue to be effective hedges.

The following table summarizes reclassifications outthe fair value of accumulated other comprehensive income (loss):derivative instruments as recorded in the Consolidated Balance Sheets:

The following tables summarize changes in balances for each component of accumulated other comprehensive income (loss):table summarizes total gains (losses) recognized on derivatives:

		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 demand for barge pumps for the marine transportation market, driven by low oil prices and overcapacityeffects 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 during the third 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 assetsderivative instruments on the CondensedCompany’s Consolidated Statements of Income.Results of Operations and Comprehensive Income (Loss) for OCI are as follows:

(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, 2022.

Executive Overview

On May 31, 2022, the Company acquired the assets of Fill-Rite and Sotera (“Fill-Rite”), a division of Tuthill Corporation, for $528.0 million. When adjusted for approximately $80.0 million in expected tax benefits, the net transaction value was approximately $448.0 million. The Company funded the transaction with cash on-hand and new debt. The Company incurred $7.1 million of one-time acquisition costs during the year ended December 31, 2022 and does not expect to incur material acquisition costs in connection with the transaction going forward. The results of operations for Fill-Rite from the acquisition date are included in the Company’s Consolidated Statements of Income for the three months ended March 31, 2023.

The following discussion of Results of Operations includes certain non-GAAP financial data and measures such as adjusted earnings per share and adjusted earnings before interest, taxes, depreciation and amortization. Adjusted earnings per share is earnings per share excluding amortization of customer backlog per share. Adjusted earnings before interest, taxes, depreciation and amortization is net income (loss) excluding interest, taxes, depreciation and amortization, adjusted earnings per share amounts whichto exclude a 2017 non-cash pension settlement chargeamortization of customer backlog, and non-cash impairment charges relating to goodwill and other intangible assets.LIFO expense. 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 inclusion of these adjusted measures should not be construed as an indication that the Company’s future results will be unaffected by unusual or infrequent items or that the items for which the Company has made adjustments are unusual or infrequent or will not recur. Further, the impact of the LIFO inventory costing method can cause results to vary substantially from company to company depending upon whether they elect to utilize LIFO and depending upon which method they may elect. 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. These non-GAAP financial measures are not intended to replace GAAP financial measures, and they are not necessarily standardized or comparable to similarly titled measures used by other companies. 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,suppression, 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. This focus has afforded us the 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 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 of $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 nine months of 2017 compared to $19.8 million in the first nine months of 2016, and earnings per share were $0.71 and $0.76 for the respective periods. Earnings per share for the first nine months of 2017 included non-cash impairment charges 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, plant and equipment of $0.03 per share.

The Company’s backlog of orders was $111.4$270.6 million at September 30, 2017March 31, 2023 compared to $102.8$195.5 million at September 30, 2016March 31, 2022 and $98.8$267.4 million at December 31, 2016. Excluding the PCCP project in 2016,2022. Fill-Rite added $11.1 million to the backlog at September 30, 2017 increased 9.6% asMarch 31, 2023 when compared to September 30, 2016.March 31, 2022. Incoming orders during the first quarter of 2023 increased 49.1% when compared to the same period in 2022, and increased 12.3% excluding Fill-Rite.

On October 26, 2017,April 27, 2023, the Board of Directors authorized the payment of a quarterly dividend of $0.125$0.175 per share on the common stock of the Company, payable December 8, 2017,June 9, 2023, to shareholders of record Novemberas of May 15, 2017. The cash dividend will represent an 8.7% increase over the dividend paid in the previous quarter.2023. This will mark the 271st293rd consecutive quarterly dividend paid by The Gorman-Rupp CompanyCompany.

Outlook

Incoming orders continued at a good pace, with total incoming orders during the quarter of $167.0 million, our backlog remains at record levels.    Inventory grew as planned during the quarter to support our order volume and backlog, while we expect a reduction in inventory levels during the 45th consecutive year of increased dividends paid to its shareholders. The dividend yield at September 30, 2017 was 1.4%.

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 assessmentsecond-half of the Company’s financial conditionyear.  We are focused on delivering long term sustained growth and business outlook at the applicable time.

Outlook

Domestic 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 continuedcontinuing to improve and we are optimistic about our incoming order rate. We are also encouraged to see capital spending increase in industries related to oil and gas drilling activity and are hopeful the momentum is sustainable. The Company remains focused on operational efficiencies and will continue to manage expenses closely. Our underlying fundamentals remain strong and we remain well positioned to drive long-term 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.margins.

Three Months Ended September 30, 2017March 31, 2023 vs. Three Months Ended September 30, 2016March 31, 2022

Net Sales

Net sales duringfor the thirdfirst quarter of 20172023 were $94.0$160.5 million compared to $91.3net sales of $102.2 million duringfor the thirdfirst quarter of 2016,2022, an increase of 2.9%57.1% 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$58.3 million. Domestic sales excluding PCCP, increased 3.5%65.4% or $2.0$47.4 million whileand international sales increased 6.0%36.7% or $2.0$10.9 million compared to the same period in 2016.2022. Fill-Rite sales, which are primarily domestic, were $40.0 million for the first quarter of 2023.

Sales

Excluding Fill-Rite, sales in our larger water markets excluding PCCP, decreased 2.2%increased 20.1% or $1.4$14.5 million in the thirdfirst quarter of 20172023 compared to the thirdfirst quarter of 2016.2022. Sales increased $7.7 million in the constructionfire suppression market, increased $2.6$3.1 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, $2.1 million in the repair market, and $1.9 million in the construction market. Partially offsetting these increases was a sales decrease of $2.2$0.3 million primarily driven by decreased shipments attributable to flood control projects, clean water and wastewater applications. In addition,in the agriculture market.

Excluding Fill-Rite, sales in the fire protection market decreased $1.8our non-water markets increased 12.8% or $3.8 million due principally to market softness in the Middle East.

Sales increased 21.7% or $5.4 million in non-water markets during the thirdfirst quarter of 20172023 compared to the thirdfirst quarter of 2016.2022. Sales increased $3.1 million in the industrial market, $0.4 million in the petroleum market, and petroleum markets increased a combined $3.2$0.3 million principally attributable to increased capital spending related to oil and gas drilling activity. Sales in the OEM market increased $2.2 million primarily related to power generation equipment and services.market.

Cost of Products Sold and Gross Profit

Gross profit was $26.2$45.5 million for the thirdfirst quarter of 2017,2023, resulting in gross margin of 27.9%28.4%, compared to gross profit of $22.7$25.5 million and gross margin of 24.8%25.0% for the same period in 2016. Gross2022. The improvement in gross margin included a non-cash pension settlement charge of $0.3 million or 30 basis pointswas due primarily to leverage from increased sales volume and sales mix which includes Fill-Rite in the third quarter of 2017 which did not occur in the third quarter of 2016. Excluding the non-cash pension settlement charge, the2023. The 340 basis point increase in gross margin was largely driven by favorablea 270 basis point improvement from labor and overhead leverage due to increased sales mixvolume and lower manufacturing overhead expenses.a 70 basis point improvement in cost of material. Gross margin for the first quarter of 2023 includes 40 basis points of amortization expense related to the Fill-Rite acquired customer backlog. The acquired customer backlog will be fully amortized during the second quarter of 2023.

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

Selling, general and administrative (“SG&A was $14.2&A”) expenses were $23.2 million and 15.2%14.5% of net sales for the thirdfirst quarter of 20172023 compared to $12.8$15.9 million and 14.0%15.5% of net sales for the same period in 2016.2022. The increase in SG&A included a non-cash pension settlement chargeexpenses is primarily due to the inclusion of $0.1 million or 20 basis pointsFill-Rite. The improvement 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 percentagepercent of sales improved 10 basis pointswas due principally to higher sales volume.

Operating Incomefavorable leverage from increased sales.