Executive Overview and Outlook

The Gorman-Rupp Company is a leading designer, manufacturer and international marketer of pumps and related equipment (pump and motor controls) for use in diverse water, wastewater, construction, 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, application and performance combined with delivery and service, and continually develops initiatives to improve performance in these key areas.

Gorman-Rupp actively pursues growth opportunities through organic growth, international business opportunities and acquisitions. We continually invest in training for our employees, new product development and modern manufacturing equipment and technology designed to increase production efficiency and capacity and drive growth by delivering innovative solutions to our customers. The Company also is currently focused on incorporating significantly changing engine designs related to new emission standards mandated by the U.S. Environmental Protection Agency ("EPA") into our applicable products. These new governmental regulations have added, and will continue to add, additional costs to engine-driven pump products.

Net sales during the first quarter ended March 31, 2012 increased 22.3% to a record $102.8 million compared to $84.1 million during the same period in 2011. International sales increased 17.5% and were 31.0% of total sales in the first quarter 2012. Primary increases in sales were in the construction, industrial, original equipment manufacturer (OEM) and agricultural markets, while municipal sales were flat primarily due to decreased sales of pumps supplied for domestic flood control projects as compared to the first quarter 2011. Net income increased 43.9% to a record $10.2 million compared to $7.1 million in the first quarter 2011. Earnings per share were $0.49 and $0.34 for the respective periods.

Record shipments during the quarter, less intense demand for pumps in natural gas drilling applications and lower incoming orders for the municipal market resulted in a backlog of $139.1 million at March 31, 2012, a 1.4% decrease from a year ago and 10.5% lower than the backlog of $155.5 million at December 31, 2011. Working capital increased 5.9% from December 31, 2011 to a record $111.2 million at March 31, 2012 primarily due to increased current accounts receivable as a result of the increase in net sales.

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

We believe that the Company is well positioned to grow organically at generally comparable operating margins over the long term by expanding our customer base both domestically and globally and through new product offerings. We expect that the increasing need for water and wastewater infrastructure rehabilitation within the United States, and similar needs internationally, along with increasing demand for pumps and pump related equipment for industrial and agricultural applications, will provide excellent opportunities for Gorman-Rupp in the future.

First Quarter 2012 Compared to First Quarter 2011

Net Sales

Sales increased across all major markets the Company serves except municipal. The largest increases were in the construction and industrial markets of $4.7 million and $4.5 million, respectively, primarily due to volume growth related to the expansion and replacement of heavy equipment user fleets and oil and gas drilling. Sales into the OEM market increased $2.9 million related to increased power generation demand and sales into the agriculture market increased $2.6 million primarily due to high commodity prices and favorable weather conditions in the United States. In addition, sales increased $1.5 million in the fire protection market and $1.4 million in the petroleum market. Municipal sales were flat primarily due to decreased sales of pumps supplied for domestic flood control projects as compared to the first quarter 2011.

Cost of Products Sold



       (Thousands of dollars)     Three Months Ended
                                       March 31,
                                  2012           2011        $ Change       % Change
       Cost of products sold    $  76,151      $ 62,688      $  13,463           21.5 %
       % of Net sales                74.1 %        74.6 %

Gross profit was $26.7 million in first quarter 2012 compared to $21.4 million in the same period in 2011, an increase of 24.7%, resulting in gross margins of 25.9% and 25.4%, respectively. Warranty expense decreased $381,000 primarily due to improved claim and processing experience.

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

Selling, General and Administrative Expenses (SG&A)



(Thousands of dollars)                          Three Months Ended
                                                     March 31,
                                               2012             2011          $ Change        % Change
Selling, general and administrative
expenses (SG&A)                              $  11,446        $ 10,727        $     719             6.7 %
% of Net sales                                    11.1 %          12.8 %

The increase in SG&A expenses was principally due to increases in wage costs of $255,000 and travel and advertising expenses of $229,000.

Net Income



     (Thousands of dollars)         Three Months Ended
                                         March 31,
                                    2012           2011         $ Change       % Change
     Income before income taxes   $  15,382      $ 10,628      $    4,754           44.7 %
     % of Net sales                    15.0 %        12.6 %

     Income taxes                 $   5,141      $  3,509      $    1,632           46.5 %
     Effective tax rate                33.4 %        33.0 %

     Net income                   $  10,241      $  7,119      $    3,122           43.9 %
     % of Net sales                    10.0 %         8.5 %

     Earnings per share           $    0.49      $   0.34      $     0.15           44.1 %

The increase in net income was primarily due to the factors described above, with earnings largely driven by improved operating leverage on record sales.

Liquidity and Capital Resources



         (Thousands of dollars)                        Three Months Ended
                                                            March 31,
                                                       2012           2011
         Net cash provided by operating activities   $   6,195      $  5,375
         Net cash used for investing activities         (4,370 )      (2,126 )
         Net cash used for financing activities         (1,889 )      (4,763 )

Cash and cash equivalents and short-term investments totaled $21.3 million, and there was $10.0 million in outstanding bank debt at March 31, 2012 which is expected to be repaid during 2012. In addition, the Company had $25.0 million available in bank lines of credit after deducting $5.0 million in outstanding letters of credit primarily related to customer orders. The Company was in compliance with its nominal restrictive covenants, including limits on additional borrowings and maintenance of certain operating and financial ratios at March 31, 2012.

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

Working capital increased 5.9% from December 31, 2011 to a record $111.2 million at March 31, 2012 primarily due to increased current accounts receivable as a result of the increase in net sales. The Company's days sales in accounts receivable, days in accounts payable and inventory turnover ratios were:

                                                     Three Months Ended
                                                         March  31,
                                                  2012       2011      2010
             Days sales in accounts receivable        53        57        55
             Days in accounts payable                 29        28        28

The increase in cash provided by operating activities of $820,000 in the first three months of 2012 compared to the same period in 2011 was primarily due to growth in sales and related operating results.

During first quarter 2012, investing activities consisted primarily of investments in machinery and equipment. Capital expenditures for the full year 2012, consisting principally of machinery and equipment, are estimated to be $14 to $17 million and are expected to be financed through internally generated funds and existing lines of credit.

Net cash used for financing activities for the three months ended March 31, 2012 consisted of dividend payments of $1.9 million. The ratio of current assets to current liabilities was 3.0 to 1 at March 31, 2012 and 3.1 to 1 at December 31, 2011.

The Company currently expects to continue its long 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.

Critical Accounting Policies

Our critical accounting policies are described in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, and in the notes to our Consolidated Financial Statements for the year ended December 31, 2011 contained in our Fiscal 2011 Annual Report on Form 10-K. Any new accounting policies or updates to existing accounting policies as a result of new accounting pronouncements have been discussed in the notes to our Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q. The application of our critical accounting policies may require management to make judgments and estimates about the amounts reflected in the Consolidated Financial Statements. Management uses historical experience and all available information to make these estimates and judgments, and different amounts could be reported using different assumptions and estimates.

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

Safe Harbor Statement

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, but are not limited to: (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.