Note A – Summary of Significant Accounting Policies

General Information and Basis of Presentation

The Gorman-Rupp 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 consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles and include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated. Earnings per share are calculated based on the weighted-average number of Common Shares outstanding.

Cash Equivalents and Short-Term Investments

The Company considers highly liquid instruments with maturities of

days or less to be cash equivalents. The Company periodically makes short-term investments for which cost approximates fair value. Short-term investments at

December

31,

2016

and

2015

consist primarily of certificates of deposit, and are classified as prepaid and other on the Consolidated Balance Sheets.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable are stated at the historical carrying amount net of allowance for doubtful accounts. The Company maintains an allowance for doubtful accounts for estimated losses from the failure of its customers to make required payments for products delivered. The Company estimates this allowance based on knowledge of the financial condition of customers, review of historical receivables and reserve trends and other relevant information.

Inventories

Inventories are stated at the lower of cost or market. The costs for approximately

72%

of inventories at

December

31,

2016

and

73%

of inventories at

December

31,

2015

are determined using the last-in,

first

-out (LIFO) method, with the remainder determined using the

first

-in,

first

-out (FIFO) method. Cost components include materials, inbound freight costs, labor and allocations of fixed and variable overheads on an absorption costing basis.

Property, plant and equipment

Property, plant and equipment are stated on the basis of cost. Repairs and maintenance costs are expensed as incurred. Depreciation for property, plant and equipment assets is computed using the straight-line method over the estimated useful lives of the assets and is included in cost of products sold and selling, general and administrative expenses based on the use of the assets. Depreciation expense was

$13.8

million during each of the years

2016

and

2015

and was

$13.2

million during

2014.

Depreciation of property, plant and equipment is determined based on the following lives:

Property, plant and equipment consist of the following:

	2016			2015
Land	$	4,099		$	3,736
Buildings		104,952			104,128
Machinery and equipment		165,157			163,875
		274,208			271,739
Less accumulated depreciation		(152,141	)		(141,852	)
Property, plant and equipment, net	$	122,067		$	129,887

Property, plant and equipment are evaluated for impairment whenever events or changes in circumstances indicate the carrying amount

may

not be recovered through future net cash flows generated by the assets. Impairment losses

may

be recorded when the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amounts based on the excess of the carrying amounts over the estimated fair value of the assets.

Goodwill and

Identifiable

Int

angible Assets

Goodwill

Goodwill represents the excess of the cost of acquired businesses over the fair value of tangible assets and identifiable intangible assets purchased and liabilities assumed.

Goodwill is reviewed annually for impairment as of

October

or whenever events or changes in circumstances indicate there

may

be a possible permanent loss of value using either a quantitative or qualitative analysis. The Company uses a market-based approach to estimate the fair value of our reporting units and performs a quantitative analysis using a discounted cash flow model and other valuation techniques. This process requires significant judgements, including estimation of future cash flows, which is dependent on internal forecasts. The Company

may

otherwise elect to perform a qualitative analysis when deemed appropriate. A qualitative analysis

may

be performed by assessing certain trends and factors, including projected market outlook and growth rates, forecasted and actual sales and operating profit margins, discount rates, industry data and other relevant qualitative factors. These trends and factors are compared to, and based on, the assumptions used in the most recent quantitative assessment.

2016,

due to the prolonged downturn in the oil and gas industry, the Bayou City Pump Company (“Bayou”) reporting unit recorded a pre-tax non-cash goodwill impairment charge of

$1.8

million. There was

goodwill impairment charge recorded in

2015

2014.

See Note H, Goodwill and Other Intangible Assets.

Identifiable intangible assets

The Company’s primary identifiable intangible assets include customer relationships, technology and drawings, and trade names and trademarks. Identifiable intangible assets with finite lives are amortized and those identifiable intangible assets with indefinite lives are not amortized. Amortization for finite-lived intangible assets is computed using the straight-line method over the estimated useful lives of the assets and is included in cost of products sold and selling, general and administrative expenses based on the use of the assets. Amortization of finite-lived intangible assets is determined based on the following lives:

Identifiable intangible assets that are subject to amortization are evaluated for impairment whenever events or changes in circumstances indicate the carrying amount

may

not be recovered through future net cash flows generated by the assets. Impairment losses

may

Identifiable intangible assets not subject to amortization are tested for impairment annually or more frequently if events warrant. The fair value of these assets is determined using a royalty relief methodology similar to that employed when the associated assets were acquired, but using updated estimates of future sales, cash flows and profitability. For

2016

and

2015,

the fair value of indefinite lived intangible assets exceeded their carrying value.

For additional information about goodwill and other intangible assets, see Note H, Goodwill and Other Intangible Assets, and Note J, Acquisitions.

Revenue Recognition

The Company’s revenues from product sales are recognized when all of the following criteria are met: persuasive evidence of a sale arrangement exists, the price is fixed or determinable, product delivery has occurred or services have been rendered, there are no further obligations to customers and collectability is probable. Product delivery occurs when the risks and rewards of ownership and title pass, which normally occurs upon shipment to the customer.

Income Taxes

Income tax expense includes United States, state, local and international income taxes. Deferred tax assets and liabilities are recognized for the tax consequences of temporary differences between the financial reporting and the tax basis of existing assets and liabilities and for loss carryforwards. The tax rate used to determine the deferred tax assets and liabilities is the enacted tax rate for the year and manner in which the differences are expected to reverse. Valuation allowances are recorded to reduce deferred tax assets to the amount that will more likely than not be realized.

Pension and Other Postretirement Benefits

The Company sponsors a defined benefit pension plan covering certain domestic employees. Additionally, the Company sponsors defined contribution pension plans made available to all domestic and Canadian employees.

The Company also sponsors a non-contributory defined benefit postretirement health care plan that provides health benefits to certain domestic and Canadian retirees and their spouses. The Company funds the cost of these benefits as incurred.

The determination of the Company’s obligation and expense for pension and other postretirement benefits is dependent on its selection of certain assumptions used by actuaries in calculating such amounts, which are described in Note G, Pensions and Other Postretirement Benefits. The Company recognizes the funded status of its defined benefit pension plan as an asset or liability in the Consolidated Balance Sheets and recognizes the change in the funded status in the year in which the change occurs through accumulated other comprehensive loss in the Consolidated Balance Sheets.

Concentration of Credit Risk

The Company generally does not require collateral from its customers and has a very good collection history. There were no sales to a single customer that exceeded

10%

of total net sales for the years ended

December

31,

2016,

2015

2014.

Shipping and Handling Costs

The Company classifies all amounts billed to customers for shipping and handling as revenue and reflects related shipping and handling costs in cost of products sold.

Advertising

The Company expenses all advertising costs as incurred, which for the years ended

December

31,

2016,

2015

and

2014

totaled

$2.8

million,

$3.2

million, and

$3.5

million, respectively.

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 cost of products sold. Changes in the Company’s product warranty liability are:

	2016			2015			2014
Balance at beginning of year	$	1,380		$	1,166		$	1,170
Provision		1,991			1,732			1,607
Claims		(1,936	)		(1,518	)		(1,611	)
Balance at end of year	$	1,435		$	1,380		$	1,166

Foreign Currency Translation

Assets and liabilities of the Company’s operations outside the United States which are accounted for in a functional currency other than U.S. dollars are translated into U.S. dollars using year-end exchange rates. Revenues and expenses are translated at weighted-average exchange rates effective during the year. Foreign currency translation gains and losses are included as a component of accumulated other comprehensive loss within equity.

Gains and losses resulting from foreign currency transactions, the amounts of which are not material, are included in other income and other expense.

Fair Value

The carrying value of cash and cash equivalents, accounts receivable, accounts payable and short-term debt approximates fair value based on the short-term nature of these instruments.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

New Accounting Pronouncements

The Company considers the applicability and impact of all Accounting Standard Updates (“ASUs”). ASUs not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on the Company’s consolidated financial statements.

February

2016,

the FASB issued ASU

2016

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 generally accepted accounting principles. The guidance is effective for fiscal years, and interim periods within those years, beginning after

December

15,

2018.

The Company currently does not expect the adoption of ASU

2016

will have a material impact on its consolidated financial statements as its future minimum lease payments are not material.

July

2015,

the FASB issued ASU

2015

11,

“Simplifying the Measurement of Inventory (Topic

330),”

which revises the measurement of inventory at the lower of cost or market. Currently, market could be replacement cost, net realizable value, or net realizable value less an approximate normal profit margin. In accordance with ASU

2015

11,

an entity will measure inventory at the lower of cost and net realizable value which is defined as the estimated selling price in the ordinary course of business less reasonably predictable costs of completion, disposal and transportation. The amendment does not apply to inventory that is measured using last-in,

first

out (LIFO). The guidance is effective for fiscal years, and interim periods within those years, beginning after

December

15,

2016;

however, early adoption is permitted. The Company currently does not expect the adoption of ASU

2015

will have a material impact on its consolidated financial statements.

May

2014,

the FASB issued ASU

2014

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. The guidance is effective for fiscal years, and interim periods within those years, beginning after

December

15,

2016;

however, in

July

2015,

the FASB approved a

one

-year deferral of this standard, with a new effective date for fiscal years beginning after

December

15,

2017.

The Company has developed an implementation plan and has determined it will use the modified retrospective method as its transition method in the adoption of the new revenue standard. The Company is currently evaluating its significant contracts and assessing the impact the adoption of ASU

2014

will have on its consolidated financial statements and related disclosures. The Company will continue its evaluation of the standards update through the date of adoption.

Machinery and equipment