UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM10-Q

For the Quarterly Period Ended June 30, 2018March 31, 2019    

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  ☒    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  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”,filer,” “smaller reporting company” and “emerging growth 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  ☒

ThereOn April 26, 2019, there were 26,117,04526,124,393 common shares, of common stock, without par value, outstanding at July 27, 2018.

of The Gorman-Rupp Company outstanding.

The Gorman-Rupp Company

Three and six months ended June 30,March 31, 2019 and 2018 and 2017

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PART I. FINANCIAL INFORMATION

ITEM 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).

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THE GORMAN-RUPP COMPANY

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

See notes to consolidated financial statements (unaudited).

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THE GORMAN-RUPP COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

See notes to consolidated financial statements (unaudited).

THE GORMAN-RUPP COMPANY

5CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)

See notes to consolidated financial statements (unaudited).

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in tables in thousands of 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 Form10-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-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. Operating results for the three and six months ended June 30, 2018March 31, 2019 are not necessarily indicative of results that may be expected for the year ending December 31, 2018.2019. For further information, refer to the consolidated financial statementsConsolidated Financial Statements and accompanying notes thereto included in the Company’s Annual Report on Form10-K for the year ended December 31, 2017,2018, from which related information herein has been derived.

Certain prior year amounts have been reclassified to conform to the three and six months ended June 30, 2018 presentation and reflect the adoption of certain accounting standard updates. These reclassifications had no impact on the Company’s previously reported net income, consolidated balance sheets, or consolidated statements of cash flows.

NOTE 2 - 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 not applicable or are expected to have minimal impact on the Company’s consolidated financial statements.Consolidated Financial Statements.

Recently Adopted Accounting Standards

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 Company adopted ASU2017-07 on January 1, 2018 on a retrospective basis. As permitted by this ASU, previously disclosed components of postretirement net periodic benefit costs were used as an estimation basis for applying the retrospective presentation as a practical expedient. See Note 7 for further details.

In May 2014, the FASB issued ASU2014-09, “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 ASU2014-09. On January 1, 2018, the Company adopted Topic 606 using the modified retrospective method. See Note 3 for further details.

Recently Issued Accounting Standards Not Yet Adopted

In February 2018, the FASB issued ASUNo. 2018-02, “Income Statement—Reporting Comprehensive Income (Topic 220)—Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,” which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the U.S. Tax Cuts and Jobs Act (“Tax Act”) signed into law in December 2017. 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 ASU2018-02 will have a material impact on its consolidated financial statements.

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In February 2016, the FASB issued ASU2016-02, “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. Subsequent accounting standards updates have been issued, which amend and/or clarify the application of ASU2016-02. 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 ASU2016-02 will have a material impact on its consolidated financial statements as its future minimum lease commitments are not material.adopted Topic 842 effective January 1, 2019. See Note 9, Leases for further details.

NOTE 3 - REVENUE

Adoption of ASU2014-09, Revenue from Contracts with Customers (Topic 606)

On January 1, 2018, the Company adopted ASU2014-09 using the modified retrospective method applied to those contracts which were not completed as of December 31, 2017. Results for reporting periods beginning after January 1, 2018 are presented under Accounting Standards Codification (“ASC”) Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with historic accounting guidance under ASC Topic 605. After assessment of the cumulative impact of adopting ASU2014-09, it was determined that the cumulative effect adjustment required under the new guidance was immaterial and therefore the Company did not record a retrospective adjustment to the opening balance of retained earnings at January 1, 2018.

Disaggregation of Revenue

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

International sales represented approximately 36%30% and 35%33% of total net sales for the secondfirst quarter of 20182019 and 2017,2018, respectively, and were made to customers in many different countries around the world.

Performance Obligations

A performance obligation is a promise in a contract to transfer a distinct good or service to a customer, and is the unit of account in ASC Topic 606. The transaction price for a customer contract is allocated to each distinct performance obligation and recognized as revenue when, or as, the Company’s performance obligation is satisfied. For product sales, other than long-term construction-type contracts, the Company recognizes revenue once control has passed at a point in time, which is generally when products are shipped. Payments received for product sales typically occur following delivery and the satisfaction of the performance obligation based upon the terms outlined in the contracts. Substantially all of our customer contracts are fixed-price contracts and the majority of our customer contracts have a single performance obligation, as the promise to transfer the individual goodsproducts or services is not separately identifiable from other promises in the contract. For customer contracts with multiple performance obligations, the Company allocates revenue to each performance obligation based on its relative standalone selling price, which is generally determined based on standalone selling prices charged to customers or using expected cost plus margin.

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All of the Company’s performance obligations, and associated revenue, are generally transferred to customers at a point in time, with the exception of certain highly customized pump products, which are transferred to the customer over time. Revenue from

The Company offers standard warranties for its products to ensure that its products comply with agreed-upon specifications in its contracts. For standard warranties, these do not give rise to performance obligations transferredand represent assurance-type warranties.

Shipping and handling activities related to products sold to customers, whether performed before or after the customer over timeobtains control of the products, are generally accounted for as activities to fulfill the promise to transfer the products and recognized in the second quarter of 2018 was $0.5 million greater than what would have been recorded prior to the adoption of ASU2014-09.not as a separate performance obligation.

On June 30, 2018,March 31, 2019, the Company had $128.9$120.8 million of remaining performance obligations, also referred to as backlog. The Company expects to recognize as revenue substantially all of its remaining performance obligations within one year.

Contract Estimates

Accounting for long-term contracts involves the use of various techniques to estimate total contract revenue and costs. For long-term contracts, the Company estimates the profit on a contract as the difference between the total estimated revenue and expected costs to complete a contract and recognizes that profit as performance obligations are satisfied. Contract estimates are based on various assumptions to project the outcome of future events that could span longer than one year. These assumptions include labor productivity and availability, the complexity of the work to be performed, the cost and availability of materials, and the performance of subcontractors as applicable.

As a significant change in one or more of these estimates could affect the profitability of our contracts, the Company reviews and updates its contract-related estimates regularly. Adjustments in estimated profit on contracts are accounted for under the cumulativecatch-up method. Under this method, the impact of the adjustment on profit recorded to date on a contract is recognized in the period the adjustment is identified. Revenue and profit in future periods of contract performance are recognized using the adjusted estimate.

Contract Balances

The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (contract assets), and customer advances and deposits (contract liabilities) onin the consolidated balance sheets.Consolidated Balance Sheets. For certain highly customized pump products, revenue is recognized over time before the customer is invoiced, resulting in contract assets. Sometimes the Company receives advances or deposits from its customers before revenue is recognized, resulting in contract liabilities. These contract assets and liabilities are reported onin the consolidated balance sheetsConsolidated Balance Sheets as a component of Other Assetsassets and Deferred Revenuerevenue and customer deposits, respectively, on acontract-by-contract basis at the end of each reporting period.

The beginning and ending balances of the Company’s contract assets and liabilities as of June 30,March 31, 2019 and December 31, 2018, arerespectively, were as follows:

Revenue recognized for the sixthree months ended June 30,March 31, 2019 and 2018 that was included in the contract liabilityliabilities balance at December 31, 2017the beginning of the period was $3.3 million.$2.4 million and $1.5 million, respectively.

NOTE 4 - INVENTORIES

InventoriesLIFO inventories are stated at the lower of cost or market and all other inventories are stated at the lower of cost or net realizable value. The costs for approximately 71% of inventories at June 30, 2018 and 72% at December 31, 2017 were determined using thelast-in,first-out (“LIFO”) method, with the remainder determined using thefirst-in,first-out (FIFO) method applied on a consistent basis. Replacement cost approximatedapproximates current cost and the excess over LIFO cost wasis approximately $61.4$64.6 million and $59.7$63.7 million at June 30, 2018March 31, 2019 and December 31, 2017,2018, respectively. Allowances for excess and obsolete inventory totaled $5.2 million and $5.3 million at March 31, 2019 and December 31, 2018, 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 expectedyear-end inventory levels and costs, and are subject to the finalyear-end LIFO inventory valuation.

Allowances for excess and obsolete inventory totaled $5.2 million and $4.9 million at June 30, 2018 and December 31, 2017, respectively.    

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

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NOTE 5 - PROPERTY, PLANT AND EQUIPMENT

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

NOTE 6 - 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 7 - PENSION AND OTHER POSTRETIREMENT BENEFITS

The Company sponsors a defined benefit pension plan (the “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) plan instead of the Plan.defined benefit pension plan. Employees hired prior to this date continue to accrue benefits under the Plan. The Company has contributed $4.0 million to the Plan in the first six months of 2018 and does not expect to make any further contributions during the remainder of the year.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 anon-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.

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

During the three and six months ended June 30,March 31, 2018, the Company recorded a settlement lossesloss relating to retirees that receivedlump-sum distributions from the Company’s defined benefit pension plan totaling $2.2 million and $2.6 million, respectively.$0.4 million. These charges were the result oflump-sum payments to retirees which exceeded the Plan’s actuarial service and interest cost thresholds.

The Company adopted ASU2017-07 on January 1, 2018 on a retrospective basis as discussed in Note 2. Pursuant to the amendments in this ASU, the service cost component is now included in cost of products sold and selling, general and administrative expenses. Thenon-service cost components of net periodic benefit costs are now included in other income (expense), net No settlement loss was incurred in the consolidated statements of income. The Company utilized the practical expedient approach, based on amounts previously disclosed, to reclassifynon-service components of net periodic benefit cost from cost of products sold and selling, general and administrative expenses, into other income (expense), net on the consolidated statements of income.

The following table summarizes the amounts reclassified into other income (expense), net for the three and six months ended June 30, 2017:March 31, 2019.

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NOTE 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 - INCOME TAXESLEASES

The Tax Act enactedOn January 1, 2019, the Company adopted ASU2016-02 using the modified retrospective method as of the effective date of January 1, 2019 (the effective date method). Under the effective date method, financial results reported in December 2017 reduced the federal corporate tax rate on U.S. earningsperiods prior to 21% and moved from a global taxation regime to a modified territorial regime. The Company’s lower effective income tax rates of 19.2% and 21.6% for the second quarter and first six months of 2018, respectively, compared to 33.5% and 32.5% for the second quarter and first six months of 2017, were due primarily2019 are unchanged. In transition to the Tax Act.

During the second quarter of 2018,new lease guidance, the Company recorded anelected the package of practical expedients permitted under the transition guidance within the new standard which allowed the Company to not reassess whether a contract is or contains a lease, lease classification and initial direct costs; however, the Company did not elect the hindsight transitional practical expedient. The Company has also elected the practical expedient to not account for lease components (e.g., fixed payments including rent, real estate taxes and insurance costs) separately from the nonlease components. After assessment of the cumulative impact of adopting ASU2016-02, it was determined that the cumulative effect adjustment of $0.2 million of income tax expenserequired under the new guidance was immaterial and therefore the Company did not record a retrospective adjustment to the provisional amounts theopening balance of retained earnings at January 1, 2019. The Company recorded in the fourth quarterrecognized additional operating leaseright-of-use assets and lease liabilities of 2017 regarding transitional impacts$1.6 million as of the Tax Act. The provisional amounts are based on the Company’s current analysis of the Tax Act. Given the significant complexity of the Tax Act and the potential for additional guidance from the U.S. Treasury, Securities and Exchange Commission or the Financial Accountings Standards Board related to the Tax Act, these estimates may be adjusted during the remainder of 2018. Adjustments to the provisional amounts recorded in the fourth quarter of 2017 will affect the Company’s tax expense in the period that the final adjustments are determined, which will be no later than the fourth quarter of 2018.January 1, 2019.

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The Company is evaluatingcurrently a lessee under a number of operating leases and one finance lease for certain aspectsoffices, manufacturing facilities, land, office equipment and automobiles, none of which are material to its operations. The Company’s leases generally have remaining lease terms of 1 year to 5 years, some of which include options to extend the Tax Act, includingleases for up to 5 years, and some of which include options to terminate the deferred tax effects ofleases within 1 year. These leases do not have significant rent escalation holidays, concessions, leasehold improvement incentives, or otherbuild-out clauses. Further, the global intangiblelow-taxed income (“GILTI”) provision of the Tax Act. Under U.S. GAAP, the Company is allowed to make an accounting policy election to either recognize deferred taxes for temporary differences expected to reverse as GILTI in future years or provide for the tax expenseleases do not contain contingent rent provisions.

Supplemental information related to GILTI resulting from those items inleases and the year the taxCompany’s Consolidated Financial Statements is incurred. As of June 30, 2018, the Company included GILTI related to current-year operations in its estimated annual effective tax rate, but has not yet made a policy decision regarding whether to record deferred taxes on GILTI. The policy decision will be made no later than the fourth quarter of 2018, and any impact of the decision will be recorded in the period the decision is made.as follows:

Maturities of lease liabilities are as follows:

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

The following discussion and analysis of the Company’s financial condition and resultsResults of operationsOperations should be read in conjunction with the consolidated financial statements,Consolidated Financial Statements, and notes thereto, and the other financial data included elsewhere in this Quarterly Report on Form10-Q. The following discussion should also be read in conjunction with the Company’s audited consolidated financial statements,Consolidated Financial Statements and accompanying notes, thereto, and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in its Annual Report on Form10-K for the year ended December 31, 2017.2018.

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 and adjusted earnings per share amounts which excludenon-cash pension settlement charges in 2018 and 2017.2018. 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 also will be useful to investors in 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.

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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.

WeGorman-Rupp actively pursuepursues 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 plus85 years.

The Company places a strong emphasis on cash flow generation and maintaining 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 June 30, 2018.March 31, 2019. The Company’s cash position increased $4.0$3.7 million during the first six monthsquarter of 20182019 to $83.7$50.2 million at June 30, 2018March 31, 2019 and the Company generated $35.1$12.8 million in adjusted earnings before interest, taxes, depreciation and amortization during the same period.

Capital expenditures for the first sixthree months of 20182019 were $5.5$2.1 million and consisted primarily of machinery and equipment. Capital expenditures for the full-year 20182019 are presently planned to be in the range of$10-15-$1520 million primarily for building expansion and machinery and equipment purchases, and are expected to be financed through internally generatedinternally-generated funds.

Net sales for the secondfirst quarter of 2019 were $96.9 million compared to $96.6 million for the first quarter of 2018, were $111.8 million compared to $97.9 million for the second quarter of 2017, an increase of 14.3%0.3% or $14.0 million, due primarily to increased sales volume in most of our markets.$0.3 million. Domestic sales increased 12.7%5.1% or $8.1$3.3 million andwhile international sales increased 17.1%decreased 9.4% or $5.9$3.0 million compared to the same period in 2017.2018.

Gross profit was $29.9$23.3 million for the secondfirst quarter of 2018,2019, resulting in gross margin of 26.7%24.1%, compared to gross profit of $27.2$26.2 million and gross margin of 27.8%27.1% for the same period in 2017. The2018. Gross margin decreased 300 basis points as a result of material cost increases due to inflation, tariffs and higher freight costs, which began to occur in the second half of 2018. Although material costs have not increased significantly from the fourth quarter of 2017 included2018, we did not leverage labor and overhead costs as we were able to do during 2018 on higher sales due to only a modest sales increase in the recordingfirst quarter of aone-time legal settlement that resulted in a favorable impact2019. Selling price increases implemented at the beginning of 50 basis points. The remaining 60 basis point decrease in gross margin was largely driven by product mix and,this year were not fully realized during the first quarter of 2019 due to a lesser extent, higher material costs.shipping of 2018 backlog.

Selling, general and administrative expenses (“SG&A”) was $14.9expenses were $14.4 million and 13.3%14.8% of net sales for the secondfirst quarter of 20182019 as compared to $14.1$14.4 million and 14.4%14.9% of net sales for the same period in 2017. Although SG&A increased due principally to personnel costs, SG&A as a percentage of sales improved 110 basis points as a result of increased sales volume.2018.

Operating income was $15.0$9.0 million, resulting in operating margin of 13.4%9.2% for the secondfirst quarter of 2018,2019, compared to operating income of $13.2$11.9 million and operating margin of 13.4%12.3% for the same period in 2017.

The Company’s effective tax rate2018. Operating margin decreased 310 basis points due principally to 19.2% for the second quarter of 2018material cost increases resulting from 33.5% for the second quarter of 2017, due primarily to the impact of the U.S. Tax Cutsinflation, tariffs, and Jobs Act (“Tax Act”) enacted in December 2017. Excluding discrete impacts of pension plan contributions and transition tax adjustments, the effective tax rate for the second quarter of 2018 was 22.1%.higher freight costs.

Net income was $10.2$7.2 million for the secondfirst quarter of 20182019 compared to $7.8$9.6 million in the secondfirst quarter of 2017,2018, and earnings per share were $0.39$0.28 and $0.30$0.37 for the respective periods. Anon-cash pension settlement charge reduced second quarter of 2018 earnings by $0.07 per share and second quarter of 2017 earnings by $0.05 per share.

Net sales for the first six months of 2018 were $208.4 million compared to $190.5 million for the first six months of 2017, an increase of 9.4% or $18.0 million. Domestic sales increased 10.9% or $13.3 million and international sales increased 6.8% or $4.7 million compared to the same period in 2017.

Gross profit was $56.1 million for the first six months of 2018, resulting in gross margin of 26.9%, compared to gross profit of $49.5 million and gross margin of 26.0% for the same period in 2017. The 90 basis point increase in gross margin was largely driven by favorable product mix.

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SG&A was $29.2 million and 14.0% of net sales for the first six months of 2018 compared to $27.7 million and 14.5% of net sales for the same period in 2017. Although SG&A increased due principally to personnel costs, SG&A as a percentage of sales improved 50 basis points as a result of increased sales volume.

Operating income was $26.8 million, resulting in operating margin of 12.9% for the first six months of 2018, compared to operating income of $21.8 million and operating margin of 11.5% for the same period in 2017. Operating margin improved 140 basis points due principally to increased sales volume and favorable product mix.

The Company’s effective tax rate decreased to 21.6% for the first six months of 2018 from 32.5% for the first six months of 2017, due primarily to the impact of the Tax Act enacted in December 2017. Excluding discrete impacts of pension plan contributions and transition tax adjustments, the effective tax rate for the first six months of 2018 was 23.1%.

Net income was $19.8 million for the first six months of 2018 compared to $12.9 million in the first six months of 2017, and earnings per share were $0.76 and $0.49 for the respective periods. Anon-cash pension settlement charge reduced the first six months of 2018 earnings by $0.08 per share and the first six months of 2017 earnings by $0.09 per share.

The Company’s backlog of orders was $128.9$120.8 million at June 30, 2018March 31, 2019 compared to $103.6$127.3 million at June 30, 2017March 31, 2018 and $114.0$113.7 million at December 31, 2017. The backlog at June 30, 2018 increased 24.4% as2018. Incoming orders decreased 5.2% compared to June 30, 2017 driven by increased incomingthe same period in 2018 while increasing 9.8% compared to the fourth quarter of 2018. The increase in orders in the first quarter of 2019 compared to the fourth quarter of 2018 included increases in most of the markets the Company serves, most notably in the municipal and fire protection markets.market.

On July 26, 2018,April 25, 2019, the Board of Directors authorized the payment of a quarterly dividend of $0.125$0.135 per share on the common stock of the Company, payable SeptemberJune 10, 2018,2019, to shareholders of record as of AugustMay 15, 2018.2019. This will mark the 274th277th consecutive quarterly dividend paid by The Gorman-Rupp Company. The dividend yield at June 30, 2018March 31, 2019 was 1.4%1.6%.

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

Outlook

Higher material costs negatively affected our results as shipments during the first quarter of 2019 largely included backlog from 2018 prior to our price increases taking effect. We do expect improvement in our margins going forward as our recent price increases are realized, and we will continue to closely monitor material costs and pricing. We are pleasedencouraged with the second quarter and six monthsincrease in incoming orders of 2018 financial results. Incoming orders have increased 15%9.8% in the first six monthsquarter of 20182019 as compared to the first six monthsfourth quarter of 20172018, which was across the majority of our markets, and we remain encouraged going in to the second half of the year. Although the agriculture market has improved somewhat, it remains soft compared to historical levels. We have begun to experience higher material costs due to the recent tariff increases and are carefully monitoring the impact of these on our material costs and sales. However, increased emphasis on infrastructure improvements at both the federal and state levels, coupled with the impact of lower taxes, could be additional positive factors over the next several years.markets. Our underlying fundamentals remain strong and we believe that 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.

The Tax Act enacted in December 2017 reduced In addition, increased emphasis on infrastructure improvements at both the federal corporate tax rate on U.S. earnings to 21% and moved from a global taxation regime to a modified territorial regime. The Company’sstate levels, coupled with the impact of lower effective income tax rates of 19.2% and 21.6% fortaxes, could be other positive factors over the second quarter and first six months of 2018, respectively, compared to 33.5% and 32.5% for the second quarter and first six months of 2017, respectively, were due primarily to the Tax Act. Excluding discrete impacts of pension plan contributions and transition tax adjustments, the effective income tax rates for the second quarter and first six months of 2018 would have been 22.1% and 23.1%, respectively. The Company’s current estimate of its full year effective income tax rate is between 23% and 25%.next several years.

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Three Months Ended June 30, 2018March 31, 2019 vs. Three Months Ended June 30, 2017March 31, 2018

Net Sales

Net sales for the secondfirst quarter of 2019 were $96.9 million compared to $96.6 million for the first quarter of 2018, were $111.8 million compared to $97.9 million for the second quarter of 2017, an increase of 14.3%0.3% or $14.0$0.3 million. Domestic sales increased 12.7%5.1% or $8.1$3.3 million andwhile international sales increased 17.1%decreased 9.4% or $5.9$3.0 million compared to the same period in 2017.2018.

Sales in our water markets increased 17.3%4.7% or $11.8$3.1 million in the secondfirst quarter of 20182019 compared to the secondfirst quarter of 2017. Sales in the fire protection market increased $5.5 million with increases both domestically and internationally due to improved economic conditions, including increased commercial building activity.2018. Sales in the municipal market increased $3.9$4.7 million driven primarily by infrastructure needs domestically and sales in the construction market increased $2.4 million due primarily to positive municipal economic sentiment. In addition, sales of repair parts increased $1.8 million, and sales in the agriculture and construction markets each increased $0.3 million.

Sales increased 7.3% or $2.2 million innon-water markets during the second quarter of 2018 compared to the second quarter of 2017. Sales in the industrialrental market increased $3.1 million due principally to increased capital spending related to oil and gas drilling activity. This increase wascustomers. These increases were partially offset by decreased sales in the OEMfire protection market of $0.5$2.4 million driven primarily by softness in international markets and decreasedadverse weather domestically. In addition, sales in the agriculture market decreased $1.3 million and sales of repair parts decreased $0.3 million.

Sales decreased 8.8% or $2.8 million in ournon-water markets during the first quarter of 2019 compared to the first quarter of 2018. Sales in the petroleum and industrial markets decreased a combined $1.5 million and sales in the OEM market of $0.4decreased $1.3 million.

International sales were $40.3$29.2 million in the secondfirst quarter of 20182019 compared to $34.4$32.2 million in the same period last year and represented 36%30% and 35%33% of total sales for the Company, in each of the two periods, respectively. International sales increaseddecreased most notably in the fire protection industrial and construction markets and decreasedmarket driven primarily by softness in the OEMoil and gas industry and in the petroleum market.

Cost of Products Sold and Gross Profit

Gross profit was $29.9$23.3 million for the secondfirst quarter of 2018,2019, resulting in gross margin of 26.7%24.1%, compared to gross profit of $27.2$26.2 million and gross margin of 27.8%27.1% for the same period in 2017. The2018. Gross margin decreased 300 basis points as a result of material cost increases due to inflation, tariffs and higher freight costs, which began to occur in the second half of 2018. Although material costs have not increased significantly from the fourth quarter of 2017 included2018, we did not leverage labor and overhead costs as we were able to do during 2018 on higher sales due to only a modest sales increase in the recordingfirst quarter of aone-time legal settlement that resulted in a favorable impact2019. Selling price increases implemented at the beginning of 50 basis points. The remaining 60 basis point decrease in gross margin was largely driven by product mix and,this year were not fully realized during the first quarter of 2019 due to a lesser extent, higher material costs.shipping of 2018 backlog.

Selling, General and Administrative Expenses (SG&A)

SG&A was $14.9expenses were $14.4 million and 13.3%14.8% of net sales for the secondfirst quarter of 20182019 as compared to $14.1$14.4 million and 14.4%14.9% of net sales for the same period in 2017. Although SG&A increased due principally to personnel costs, SG&A as a percentage of sales improved 110 basis points as a result of increased sales volume.2018.

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Operating Income