(Dollars in thousands, except for per share amounts)

The following discussion and analysis of 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, 2020.2021. The coronavirus (COVID-19) pandemic has had an adverse effect on the Company’s reported results althoughin 2021 and while our facilities and supply chainchains continue to face challenges our reported results have remained operational through the pandemic.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 non-cash pension settlement charges in 2021 and 2020.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 in assessing the 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.

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 for more than 85 years.historically.

The Company places a strong emphasis on cash flow generation and maintaining excellent liquidity and financial flexibility.liquidity. This focus has afforded us the ability to reinvest our cash resources and preserve a strong balance sheet and position us for future acquisitionin acquisitions and product development opportunities. The Company had no bank debt as of June 30, 2021. The Company’s cash position increased $16.1decreased $2.5 million during the first sixthree months of 20212022 to $124.3$123.0 million at June 30, 2021March 31, 2022 and the Company generated $26.0$12.5 million in adjusted earnings before interest, taxes, depreciation and amortization during the same period.

Capital expenditures for the first sixthree months of 20212022 were $3.5 million and consisted primarily of machinery and equipment and building improvements. Capital expenditures for the full-year 20212022 are presently planned to be in the range of $12-$15-$1520 million primarily for building improvements and machinery and equipment purchases, and are expected to be financed through internally-generated funds.

Net salesThe Company’s backlog of orders was $195.5 million at March 31, 2022 compared to $125.5 million at March 31, 2021 and $186.0 million at December 31, 2021. Incoming orders increased 9.6% for the secondfirst quarter of 2021 were $93.0 million compared to net sales of $85.8 million for the second quarter of 2020, an increase of 8.4% or $7.2 million. Domestic sales increased 8.1% or $4.8 million and international sales increased 9.1% or $2.4 million2022 compared to the same period in 2020. As2021. Incoming orders were up across most markets the global economy has started to recover from the COVID-19 pandemic, sales and incoming orders have increased across nearly all of our markets.

Gross profit was $24.7 million for the second quarter of 2021, resulting in gross margin of 26.5%, compared to gross profit of $21.8 million and gross margin of 25.5% for the same period in 2020. Gross margin improved 100 basis points due to improved leverage on fixed labor and overhead resulting from increased sales volume.

Selling, general and administrative (“SG&A”) expenses were $14.1 million and 15.1% of net sales for the second quarter of 2021 compared to $12.9 million and 15.0% of net sales for the same period in 2020. SG&A expenses increased 9.4% or $1.2 million and increased 10 basis points as a percentage of sales. The increase in SG&A expenses is the result of compensation, travel and other expense items returning closer to pre-pandemic levels as operational activities begin to return to normal.

Operating income was $10.6 million for the second quarter of 2021, resulting in an operating margin of 11.4%, compared to operating income of $9.0 million and operating margin of 10.5% for the same period in 2020. Operating margin improved 90 basis points primarily as a result of improved leverage on fixed labor and overhead resulting from increased sales volume.

Other income (expense), net was $1.7 million of expense for the second quarter of 2021 compared to expense of $1.9 million for the same period in 2020. The decrease to expense was due primarily to a decrease in non-cash pension settlement charges from $1.9 million in the second quarter of 2020 to $1.7 million in the second quarter of 2021.

Net income was $7.1 million for the second quarter of 2021 compared to $5.6 million in the second quarter of 2020, and earnings per share were $0.27 and $0.22 for the respective periods. Earnings per share for the second quarter included a non-cash pension settlement charge of $0.05 per share in 2021 and $0.06 per share in 2020.

Net sales for the first six months of 2021 were $182.0 million compared to net sales of $177.5 million for the first six months of 2020, an increase of 2.6% or $4.5 million. Domestic sales increased 1.7% or $2.0 million and international sales increased 4.7% or $2.5 million compared to the same period in 2020.

Gross profit was $47.7 million for the first six months of 2021, resulting in gross margin of 26.2%, compared to gross profit of $45.3 million and gross margin of 25.5% for the same period in 2020. Gross margin improved 70 basis points due principally to improved leverage on fixed labor and overhead resulting from increased sales volume compared to the first six months of 2020.

SG&A expenses were $28.1 million and 15.5% of net sales for the first six months of 2021 compared to $27.7 million and 15.6% of net sales for the same period in 2020. SG&A expenses increased 1.5% or $0.4 million but improved 10 basis points as a percentage of sales.

Operating income was $19.6 million for the first six months of 2021, resulting in an operating margin of 10.8%, compared to operating income of $17.6 million and operating margin of 9.9% for the same period in 2020. Operating margin improved 90 basis points primarily as a result of improved leverage on fixed labor and overhead resulting from increased sales volume compared to the first six months of 2020.

Other income (expense), net was $1.4 million of expense for the first six months of 2021 compared to expense of $3.6 million for the same period in 2020. The decrease to expense was due primarily to reduced non-cash pension settlement charges of $1.7 million in 2021 compared to $3.4 million in 2020.

Net income was $14.5 million for the first six months of 2021 compared to $11.1 million in the first six months of 2020, and earnings per share were $0.56 and $0.43 for the respective periods. Earnings per share included a non-cash pension settlement charge of $0.05 per share in 2021 and $0.10 per share in 2020.Company serves.

The Company’s backlog of orders was $153.0 million at June 30, 2021 compared to $110.3 million at June 30, 2020 and $113.1 million at December 31, 2020. Incoming orders increased 21.6% for the first six months of 2021 compared to the same period in 2020. Incoming orders during the second quarter of 2021 increased 46.6% when compared to the same period last year.

On July 22, 2021,April 28, 2022, the Board of Directors authorized the payment of a quarterly dividend of $0.155$0.17 per share on the common stock of the Company, payable SeptemberJune 10, 2021,2022, to shareholders of record as of AugustMay 13, 2021.2022. This will mark the 286th289th 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 transaction is expected to close in the second quarter of 2022.  In connection with the anticipated closing of the transaction, the Company expects to 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 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

Although the timing of the global economy fully recovering from the COVID-19 pandemic remains somewhat uncertain, our sales and incoming orders improved in the first half of this year. The increases in sales and incoming orders has been broad-based across almost all of our major markets and has resulted in a strong backlog position at the beginning of the third quarter of 2021.  We continue to manage developments insee top line growth across most of our markets and incoming order trends remain positive.  Although backlog is still at a historically high level, our aging is consistent.   While we have leveraged labor and overhead, inflationary pressures on cost of material persist, so we will continue to adjust our pricing to offset these increases.   It appears that global supply chain related to availability, increased lead times, transportationchallenges will extend into the foreseeable future.  We are navigating these challenges and rising material costs. To the extent that these could impact our financial results,believe we are taking measures in an effort to mitigate risks and ensure that we arewill be able to continue to meet our customers’ needs. We remain well positioned to maximize the opportunity as the economy recovers while at the same time continuing to focus on our long-term strategic initiatives.maintain top line growth.

Three Months Ended June 30, 2021March 31, 2022 vs. Three Months Ended June 30, 2020March 31, 2021

Net Sales

Net sales for the secondfirst quarter of 20212022 were $93.0$102.2 million compared to net sales of $85.8$89.0 million for the secondfirst quarter of 2020,2021, an increase of 8.4%14.8% or $7.2$13.2 million. Domestic sales of $72.4 million increased 8.1% or $4.8 million15.6% and international sales of $29.8 million increased 9.1% or $2.4 million12.8% compared to the same period in 2020. As the global economy has started to recover from the COVID-19 pandemic, sales and incoming orders2021. Sales have increased across nearly all of our markets. markets and incoming orders for the quarter increased 9.6% compared to the first quarter of 2021 to $112.0 million.

Sales in our water markets increased 4.5%11.5% or $2.8$7.5 million in the secondfirst quarter of 20212022 compared to the secondfirst quarter of 2020.2021. Sales increased $3.1 million in the repair market, $1.6 million in the construction market, $0.9$5.9 million in the fire protection market, and $0.5$2.3 million in the agricultureconstruction market, and $1.6 million in the repair market. Partially offsetting these increases was a sales decrease of $3.3$2.2 million in the municipal market primarily dueand $0.1 million in the agriculture market. Incoming orders and backlog for the municipal and agriculture markets were up compared to timing of shipments.the prior year period.

Sales in our non-water markets increased 18.1%23.3% or $4.4$5.7 million in the secondfirst quarter of 20212022 compared to the secondfirst quarter of 2020.2021. Sales increased $2.1$3.7 million in the petroleumindustrial market, $2.0$1.7 million in the OEM market, and $0.3 million in the industrialpetroleum market.

Cost of Products Sold and Gross Profit

Gross profit was $24.7$25.5 million for the secondfirst quarter of 2021,2022, resulting in gross margin of 26.5%25.0%, compared to gross profit of $21.8$23.0 million and gross margin of 25.5%25.9% for the same period in 2020. Gross2021. The 90 basis point decrease in gross margin improvedwas driven by a 200 basis point increase in cost of material, which included an unfavorable LIFO impact of 100 basis points, due to improved leverage on fixedpartially offset by a 110 basis point improvement from labor and overhead resulting fromleverage due to increased sales volume.

Selling, General and Administrative (SG&A) Expenses

Selling, general and administrative (“SG&A”) expenses were $14.1$16.0 million and 15.1%15.7% of net sales for the secondfirst quarter of 20212022 compared to $12.9$14.1 million and 15.0%15.8% of net sales for the same period in 2020.2021. SG&A expenses increased 9.4%14.0% or $1.2$1.9 million as a result of increased payroll and payroll related costs and increased 10 basis pointstravel expenses. SG&A expenses as a percentage of sales. The increase in SG&A expenses is thesales improved 10 basis points primarily as a result of compensation, travel and other expense items returning closer to pre-pandemic levels as operational activities begin to return to normal.leverage on fixed costs from increased sales volume.

Operating Income

Operating income was $10.6$9.5 million for the secondfirst quarter of 2021,2022, resulting in an operating margin of 11.4%9.3%, compared to operating income of $9.0 million and operating margin of 10.5%10.1% for the same period in 2020.2021. Operating margin improved 90decreased 80 basis points primarily as a result of the increased cost of material due to unfavorable LIFO adjustments partially offset by improved leverage on fixed labor and overhead resultingcosts from increased sales volume.

Net Income

The Company’s effective tax rate was 21.0% for the first quarter of 2022 compared to 20.3% for the secondfirst quarter of 2021 and 2020.2021.

Net income was $7.1$7.5 million for the secondfirst quarter of 20212022 compared to $5.6$7.4 million in the secondfirst quarter of 2020,2021, and earnings per share were $0.27$0.29 and $0.22 for the respective periods. Earnings per share for the second quarter included a non-cash pension settlement charge of $0.05 per share in 2021 and $0.06 per share in 2020.

Six Months Ended June 30, 2021 vs. Six Months Ended June 30, 2020

Net Sales

Net sales for the first six months of 2021 were $182.0 million compared to net sales of $177.5 million for the first six months of 2020, an increase of 2.6% or $4.5 million. Domestic sales increased 1.7% or $2.0 million and international sales increased 4.7% or $2.5 million compared to the same period in 2020.

Sales in our water markets increased 2.7% or $3.4 million in the first six months of 2021 compared to the first six months of 2020. Sales increased $4.0 million in the repair market, $2.1 million in the construction market, and $0.7 million in the agriculture market. Partially offsetting these increases was a decrease of $3.4 million in the municipal market, while the fire market was flat.

Sales in our non-water markets increased 2.2% or $1.1 million in the first six months of 2021 compared to the first six months of 2020. Sales in the petroleum market increased $2.2 million and sales in the OEM market increased $1.0 million. Partially offsetting these increases was a decrease of $2.1 million in the industrial market.

Cost of Products Sold and Gross Profit