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, applications 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 third quarter 2012 were $91.6 million compared to $90.2 million during the same period in 2011. Net income during the quarter was $6.7 million compared to $7.7 million in the third quarter 2011, a 13.0% decrease. Earnings per share were $0.32 and $0.37 for the respective periods.

Net sales for the nine months ended September 30, 2012 increased 7.7% to a record $287.0 million compared to $266.4 million during the same period in 2011. Both years benefited from increases in our seasonal agriculture market business contributed by our 2010 acquisition of National Pump Company. Net income increased 3.4% to a record $24.5 million compared to $23.7 million in the first nine months of 2011. Earnings per share were $1.17 and $1.13 for the respective periods.

Sales increased a modest 1.6% during the quarter compared to the same period last year. Sales improved 10.3% in our larger water markets group and declined 12.0% in our non-water markets. Major contributions to water market sales were shipments of pumps for domestic flood control, and shipments of pumps for water supply and sewage systems domestically and internationally. The quarter's non-water market decreases were primarily in the OEM market due to the scale-down of U.S. military operations overseas, and shipments of fabricated products related to power generation declined due to the slow and unsteady economic recovery and related reduced power demands in North America.

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

The decrease in earnings for the quarter was principally driven by a less favorable product mix among the market groups, combined with selling, general and administrative expense increases due to healthcare costs and the completion of the Pumptron acquisition.

The Company's backlog of orders was $146.7 million at September 30, 2012 compared to $157.9 million a year ago and $155.5 million at December 31, 2011. The planned decrease in backlog from September 30, 2011 and December 31, 2011 was primarily due to record shipments during the twelve months ending September 30, 2012 combined with lower incoming orders for the construction market. The backlog is expected to be boosted in the first quarter of 2013 by approximately $70 million based on a letter of intent to the Company to supply major flood control pumps for a member of the joint venture construction group for a significant New Orleans flood control project as announced by the Company October 1, 2012. The award of this joint venture project has been protested by unsuccessful bidders and is expected to be resolved by the end of January 2013.

The Company remains focused on providing high quality products, executing on profitable growth and acquisition opportunities and maintaining a very strong balance sheet which provides excellent financial flexibility. We expect to continue to encounter headwinds in the near-term related to the very uncertain domestic and global macroeconomic conditions important to most of the markets the Company serves.

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 growth opportunities for Gorman-Rupp in the future.

The Company's defined benefit pension plan administrator confirmed that the actuarial payment threshold relating to retirees receiving lump-sum distributions was exceeded during October 2012. As a result, a pension settlement loss estimated to be $2.1 million and approximately $0.10 to $0.12 per share, net of income taxes, will be required by GAAP to be recorded during the fourth quarter 2012.

Third Quarter 2012 Compared to Third Quarter 2011

Net Sales

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

Sales increased $5.1 million in the water markets group primarily due to increased sales in the municipal market of $6.3 million principally due to shipments of pumps for domestic flood control, and shipments of pumps for water supply and sewage systems domestically and internationally. Also, sales in the fire protection market increased $1.9 million primarily as a result of international shipments. The construction market decreased $3.3 million due to continued reduced demand for pumps for natural gas drilling applications and from decreases in rental businesses relative to the higher level of sales experienced during 2011 due to pent-up demand.

Sales decreased $3.5 million in the non-water markets group primarily due to lower sales in the OEM market largely as a result of the scale-down of U.S. military operations overseas and reduced shipments of fabricated products related to power generation.

Cost of Products Sold and Gross Profit



                                  Three Months Ended
                                     September 30,
       (Thousands of dollars)     2012           2011         $ Change      % Change
       Cost of products sold    $  69,796      $ 67,748      $    2,048           3.0 %
       % of Net sales                76.2 %        75.1 %
       Gross profit                  23.8 %        24.9 %

The decrease in the gross margin percentage was principally due to a less favorable product mix among the market groups driven primarily by lower sales in the OEM and construction markets. In addition, warranty and healthcare expense increased $378,000 and $341,000, respectively.

Selling, General and Administrative Expenses (SG&A)



                                                Three Months Ended
                                                   September 30,
(Thousands of dollars)                         2012             2011          $ Change        % Change
Selling, general and administrative
expenses (SG&A)                              $  11,727        $ 10,941        $     786             7.2 %
% of Net sales                                    12.8 %          12.1 %

The increase in SG&A expenses was principally due to increases in professional fees of $223,000 primarily due to the acquisition of Pumptron and associated legal fees, and in travel and advertising expenses of $139,000 related to trade shows. Also, a change in the allocation of profit sharing in the third quarter 2012 compared to the same period last year resulted in an increase of $268,000.

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

Net Income



                                   Three Months Ended
                                      September 30,
    (Thousands of dollars)         2012           2011        $ Change        % Change
    Income before income taxes   $  10,141      $ 11,202      $  (1,061 )          (9.5 %)
    % of Net sales                    11.1 %        12.4 %

    Income taxes                 $   3,435      $  3,547      $    (112 )          (3.2 %)
    Effective tax rate                33.9 %        31.7 %

    Net income                   $   6,706      $  7,655      $    (949 )         (12.4 %)
    % of Net sales                     7.3 %         8.5 %

    Earnings per share           $    0.32      $   0.37      $   (0.05 )         (13.5 %)

The decrease in net income was primarily due to the factors described above, including the negative impacts of a less favorable product mix combined with selling, general and administrative expense increases. The difference in the effective tax rate between the two periods is primarily due to the federal research and development tax credit that has not been extended for 2012, I.R.S. audit adjustments relating to transfer pricing for tax years 2009 and 2010 paid in 2012, and higher earnings in the third quarter 2011 in foreign jurisdictions taxed at lower rates relative to the United States.

Nine Months 2012 Compared to Nine Months 2011

Net Sales

Record nine-month sales included increases in both the water and non-water market groups. The larger water markets group increased $13.2 million primarily due to improved sales of $9.5 million in the fire protection market due to an increase in sales internationally and higher sales of $4.5 million in the agriculture market due to agricultural cash-flow benefits from high commodity prices and drought conditions in the United States. The non-water markets group increased $8.0 million primarily due to higher sales in the petroleum and industrial markets related to oil and natural gas drilling.

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

Cost of Products Sold and Gross Profit



                                   Nine Months Ended
                                     September 30,
       (Thousands of dollars)     2012           2011         $ Change      % Change
       Cost of products sold    $ 215,789      $ 198,346      $  17,443           8.8 %
       % of Net sales                75.2 %         74.4 %
       Gross profit                  24.8 %         25.6 %

The decrease in the gross margin percentage was principally due to a less favorable product mix among the market groups driven primarily by lower sales in the OEM and construction markets. In addition, healthcare and depreciation expense increased $952,000 and $485,000, respectively.

Selling, General and Administrative Expenses (SG&A)



                                                Nine Months Ended
                                                  September 30,
(Thousands of dollars)                         2012            2011           $ Change        % Change
Selling, general and administrative
expenses (SG&A)                              $ 34,420        $ 32,436        $    1,984             6.1 %
% of Net sales                                   12.0 %          12.2 %

The increase in SG&A expenses was principally due to increases of $449,000 in wage costs and $501,000 in travel and advertising expenses related to trade shows. Also, a change in the allocation of profit sharing in 2012 compared to 2011 resulted in an increase of $470,000.

Net Income



                                     Nine Months Ended
                                       September 30,
      (Thousands of dollars)         2012          2011         $ Change      % Change
      Income before income taxes   $ 37,110      $ 35,245      $    1,865           5.3 %
      % of Net sales                   12.9 %        13.2 %

      Income taxes                 $ 12,595      $ 11,546      $    1,049           9.1 %
      Effective tax rate               33.9 %        32.8 %

      Net income                   $ 24,515      $ 23,699      $      816           3.4 %
      % of Net sales                    8.5 %         8.9 %

      Earnings per share           $   1.17      $   1.13      $     0.04           3.5 %

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

The increase in net income was primarily due to the factors described above. The difference in the effective tax rate between the two periods was primarily due to the federal research and development tax credit that has not been extended for 2012 resulting in a decrease of $0.01 per share and I.R.S audit adjustments relating to transfer pricing for tax years 2009 and 2010 paid in 2012.

Liquidity and Capital Resources



                                                       Nine Months Ended
                                                          September 30
        (Thousands of dollars)                        2012           2011
        Net cash provided by operating activities   $  20,665      $  18,305
        Net cash used for investing activities        (18,171 )       (7,975 )
        Net cash used for financing activities         (8,088 )      (15,568 )

Cash and cash equivalents and short-term investments totaled $15.0 million, and there was $8.0 million in outstanding bank debt at September 30, 2012. In addition, the Company had $24.3 million available in bank lines of credit after deducting $5.7 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 September 30, 2012.

Working capital increased 8.3% from December 31, 2011 to $113.7 million at September 30, 2012 primarily due to increased inventory and current accounts receivable.

Liquidity Ratios



                                                      Nine Months Ended
                                                        September 30,
                                                   2012      2011      2010
              Days sales in accounts receivable       56        55        56
              Days in accounts payable                25        28        27
              Days in inventory                      164       152       150

The change in cash provided by operating activities of $2.4 million in the nine months of 2012 compared to the same period in 2011 was primarily due to a reduction between periods in the use of cash required to fund inventory and changes in accounts payable balances.

During the first nine months of 2012, investing activities of $18.2 million primarily consisted of capital expenditures of $2.4 million for an expansion of the National Pump Company facilities and $10.8 million of machinery and equipment. In addition, $4.8 million of cash was used for the acquisition of Pumptron. Capital expenditures for the full year 2012, consisting principally of machinery and equipment, are estimated to be $15 to $18 million and are expected to be financed through internally generated funds and existing lines of credit.

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

Net cash used for financing activities for the nine months ended September 30, 2012 consisted of dividend payments of $6.1 million and re-payment of $2.0 million in short-term debt. The ratio of current assets to current liabilities was 3.3 to 1 at September 30, 2012 and 3.1 to 1 at December 31, 2011.

The Company currently expects to continue its distinguished 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.

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 Item and elsewhere herein are 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. Except to the extent required by law, we do not undertake and specifically decline any obligation to review or update any forward-looking statements or to publicly announce the results of any revisions to any of such statements to reflect future events or developments or otherwise.