In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, The Gorman-Rupp Company provides the following cautionary statement: Certain statements in this section and elsewhere herein contain various forward-looking statements and include assumptions concerning The Gorman-Rupp Company's operations, future results and prospects. These forward-looking statements are based on current expectations about important economic, political, and technological factors, among others, and are subject to risk and uncertainties, the absence of which could cause the actual results or events to differ materially from those set forth in or implied by the forward-looking statements and related assumptions.
Such factors include the following: (1) continuation of the current and projected future business environment, including interest rates and capital and consumer spending; (2) competitive factors and competitor responses to Gorman-Rupp initiatives; (3) successful development and market introductions of anticipated new products; (4) stability of government laws and regulations, including taxes; (5) stable governments and business conditions in emerging economies; (6) successful penetration of emerging economies; and
(7) continuation of the favorable environment to make acquisitions, domestic and foreign, including regulatory requirements and market values of candidates.

PART I - CONTINUED
ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
          OF OPERATIONS - CONTINUED


Third Quarter 2009 Compared to Third Quarter 2008
Net Sales

                                   Three Months Ended
                                      September 30,
        (Thousands of dollars)      2009          2008       $ Change       % Change
        Net sales                $   64,096     $ 84,188     $ (20,092 )        (23.9 )%

The global economic downturn continues to have a negative impact on the Company's business, resulting in the decline in sales for the quarter across most of the markets the Company serves. The largest declines were in the fire protection market of $6.9 million, the construction and rental markets of $4.9 million, the OEM market of $2.6 million, wastewater of $2.5 million and the industrial market of $2.2 million. Partially offsetting these decreases was an increase in custom pump sales of $2.3 million.

Cost of Products Sold

                                   Three Months Ended
                                      September 30,
        (Thousands of dollars)      2009          2008       $ Change       % Change
        Cost of products sold    $   47,996     $ 64,016     $ (16,020 )        (25.0 )%
        % of Net sales                 74.9 %       76.0 %

The decrease in cost of products sold was primarily due to lower sales volume which resulted in decreased material costs of $12.1 million, including a $2.4 million decrease in LIFO expense due to reduced inventory levels resulting in partial liquidation of LIFO quantities and lower inflation expectations for the remainder of 2009. Primarily due to lower production levels, manufacturing costs included decreases in compensation and payroll taxes of $2.0 million and supplies, patterns and tooling of $544,000. In addition, warranty expense decreased $655,000 due to estimates related to lower sales volume and claims experience. Partially offsetting these decreases was increased pension expense of $451,000 resulting from the significant market value declines in the worldwide equity markets in 2008. The overall decrease in cost of products sold as a percent of net sales was due primarily to decreased LIFO expense as mentioned above.
Selling, General, and Administrative Expenses (SG&A)

                                           Three Months Ended
                                             September 30,
(Thousands of dollars)                    2009            2008          $ Change        % Change
Selling, general, and
administrative expenses (SG&A)         $    8,373       $   9,140      $     (767 )          (8.4 )%
% of Net sales                               13.1 %          10.9 %

The decrease in SG&A expenses is principally due to lower advertising and travel expenses of $309,000 as the previous year included expenses related to trade shows. In addition, the level of these types of expenses has been curtailed in 2009 due to the economic downturn. Also, compensation and payroll taxes decreased $295,000 principally due to reduced headcount and temporary salary reductions, and profit sharing expense decreased $112,000 related to lower operating income.

Other Income

                                  Three Months Ended
                                     September 30,
      (Thousands of dollars)     2009            2008         $ Change       % Change
      Other income             $     142       $     440     $     (298 )        (67.7 )%
      % of Net sales                  .2 %           0.5 %

The decrease in other income is primarily due to lower interest income due to a decline in interest rates.

Net Income

                                     Three Months Ended
                                        September 30,
      (Thousands of dollars)         2009           2008       $ Change       % Change
      Income before income taxes   $   7,805      $ 11,409     $  (3,604 )        (31.6 )%
      % of Net sales                    12.2 %        13.6 %

      Income taxes                 $   2,628      $  4,024     $  (1,396 )        (34.7 )%
      Effective tax rate                33.7 %        35.3 %

      Net income                   $   5,177      $  7,385     $  (2,208 )        (29.9 )%
      % of Net sales                     8.1 %         8.8 %

      Earnings per share           $    0.31      $   0.44     $   (0.13 )        (29.5 )%

Nine Months 2009 Compared to Nine Months 2008

Net Sales

                                    Nine Months Ended
                                      September 30,
        (Thousands of Dollars)     2009          2008        $ Change       % Change
        Net sales                $ 204,039     $ 249,653     $ (45,614 )        (18.3 )%

The global economic downturn continues to have a negative impact on the Company's business, as declines in sales in the first nine months of 2009 were across most of the markets the Company serves.

The largest declines were in the construction and rental markets of $13.4 million, the fire protection market of $11.2 million, the OEM market of $6.4 million, wastewater of $5.0 million and the industrial market of $4.9 million.
The backlog at September 30, 2009 was $85.2 million compared to $128.3 million at September 30, 2008, representing a 34% decrease primarily due to a lessening of orders in the fire protection and original equipment markets.

Cost of Products Sold

                                    Nine Months Ended
                                      September 30,
        (Thousands of Dollars)     2009          2008        $ Change       % Change
        Cost of products sold    $ 156,804     $ 189,231     $ (32,427 )        (17.1 )%
        % of Net sales                76.9 %        75.8 %

The decrease in cost of products sold was primarily due to lower sales volume, which resulted in decreased material costs of $24.6 million, including a $3.8 million decrease in LIFO expense due to reduced inventory levels resulting in partial liquidation of LIFO quantities and lower inflation expectations for the remainder of 2009. Manufacturing costs included decreases in compensation and payroll taxes of $4.9 million and supplies, patterns and tooling of $1.4 million primarily due to lower production levels. Also, warranty expense decreased $854,000 due to estimates related to lower sales volume and claims experience and profit sharing expense decreased $705,000 related to lower operating income. Partially offsetting these decreases is increased pension expense of $1.4 million resulting from the significant market value declines in the worldwide equity markets in 2008. The overall increase in cost of products sold as a percent of net sales was due primarily to decreased operating leverage on lower sales volume.
Selling, General, and Administrative Expenses (SG&A)

                                           Nine Months Ended
                                             September 30,
(Thousands of Dollars)                    2009           2008          $ Change        % Change
Selling, general, and
administrative expenses (SG&A)         $   26,151      $  27,995      $   (1,844 )          (6.6 )%
% of Net sales                               12.8 %         11.2 %

The decrease in SG&A expenses is principally due to lower advertising and travel expenses of $1.1 million and supplies of $303,000 as the previous year included expenses related to the Construction Expo and IFAT trade shows held every three years. In addition, the level of these types of expenses has been curtailed in 2009 due to the economic downturn. Profit sharing expense decreased $428,000 related to lower operating income and business taxes decreased $229,000 due to amended franchise tax returns and reduced income. Compensation and payroll taxes decreased $199,000 principally due to reduced headcount and temporary salary reductions. Professional services decreased $182,000 primarily due to expenses in 2008 relating to computer system upgrades. Partially offsetting these decreases are increases in pension expense of $537,000 resulting from the significant market value declines in the worldwide equity markets in 2008 and in healthcare expense of $420,000 due to increased medical claims and higher medical costs.

Other Income

                                   Nine Months Ended
                                     September 30,
        (Thousands of Dollars)      2009         2008        $ Change       % Change
        Other income             $    1,051     $ 2,003     $     (952 )        (47.5 )%
        % of Net sales                  0.5 %       0.8 %

The decrease in other income is primarily due to lower interest income due to a decline in interest rates.

Net Income

                                     Nine Months Ended
                                       September 30,
      (Thousands of Dollars)         2009          2008       $ Change       % Change
      Income before income taxes   $  21,875     $ 34,230     $ (12,355 )        (36.1 )%
      % of Net sales                    10.7 %       13.7 %

      Income taxes                 $   7,325     $ 11,798     $  (4,473 )        (37.9 )%
      Effective tax rate                33.5 %       34.5 %

      Net income                   $  14,550     $ 22,432     $  (7,882 )        (35.1 )%
      % of Net sales                     7.1 %        9.0 %

      Earnings per share           $    0.87     $   1.34     $   (0.47 )        (35.1 )%


Liquidity and Sources of Capital

                                                      Nine Months Ended
                                                        September 30,
(Thousands of dollars)                               2009           2008          $ Change
Net cash provided by operating activities         $   43,876      $  27,398      $   16,478
Net cash used for investing activities                34,023          6,305          27,718
Net cash provided by (used for) financing
activities                                            19,795         (5,010 )        24,805

Cash provided by operating activities resulted primarily from cash being made available due to reduced inventory levels of $11.5 million and lower accounts receivable balances of $8.9 million due to lower sales volume. Also, cash of $2.4 million was provided by the reduction of prepaid income taxes applied to the Company's current tax liability. Partially offsetting these increases to cash was a decrease in accounts payable of $4.9 million.
Investing activities for the nine months ended September 30, 2009 primarily consisted of capital expenditures related to the consolidation and expansion of the Mansfield, Ohio facilities of $28.3 million and machinery and equipment additions of $6.1 million. Total capital expenditures for the previously announced expansion of the Mansfield, Ohio facilities (facilities) of $51.7 million have been incurred as of September 30, 2009.
Financing activities for the nine months ended September 30, 2009 consisted of short-term borrowings of $24.8 million at LIBOR plus 75 basis points to partially finance the above mentioned facilities. Also included were payments for dividends of $5.0 million. The ratio of current assets to current liabilities was 2.4 to 1 at September 30, 2009 and 4.0 to 1 at September 30, 2008.
The Company has been negatively impacted by the severe global recession during the fourth quarter 2008 and the nine months ended September 30, 2009. It is expected that the Company's operations and financial results will continue to be negatively impacted in similar fashion during the balance of 2009.