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EX-31.1 - EXHIBIT 31.1 - FLOWSERVE CORPfls9-30x15exhibit311.htm
EX-32.1 - EXHIBIT 32.1 - FLOWSERVE CORPfls9-30x15exhibit321.htm
EX-32.2 - EXHIBIT 32.2 - FLOWSERVE CORPfls9-30x15exhibit322.htm
EX-31.2 - EXHIBIT 31.2 - FLOWSERVE CORPfls9-30x15exhibit312.htm
 
 
 


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2015
OR

¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM           to          .
Commission File No. 1-13179
FLOWSERVE CORPORATION
(Exact name of registrant as specified in its charter)

New York
 
31-0267900
(State or other jurisdiction of incorporation or organization)
 
 (I.R.S. Employer Identification No.)
 
 
 
5215 N. O’Connor Blvd., Suite 2300, Irving, Texas
 
75039
(Address of principal executive offices)
 
 
 (Zip Code)

 
(972) 443-6500
 
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). þ Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
Accelerated filer ¨
Non-accelerated filer ¨ (do not check if a smaller reporting company)
Smaller reporting company ¨
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes þ No
As of October 22, 2015, there were 130,869,128 shares of the issuer’s common stock outstanding.


 
 
 




FLOWSERVE CORPORATION
FORM 10-Q
TABLE OF CONTENTS

 
Page
 
No.
 
 
 
 
 
 EX-31.1
 
 EX-31.2
 
 EX-32.1
 
 EX-32.2
 
 EX-101 INSTANCE DOCUMENT
 
 EX-101 SCHEMA DOCUMENT
 
 EX-101 CALCULATION LINKBASE DOCUMENT
 
 EX-101 LABELS LINKBASE DOCUMENT
 
 EX-101 PRESENTATION LINKBASE DOCUMENT
 
 EX-101 DEFINITION LINKBASE DOCUMENT
 
i



PART I — FINANCIAL INFORMATION

Item 1.
Financial Statements.
FLOWSERVE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Amounts in thousands, except per share data)
Three Months Ended September 30,
 
2015
 
2014
Sales
$
1,096,476

 
$
1,204,012

Cost of sales
(707,726
)
 
(782,522
)
Gross profit
388,750

 
421,490

Selling, general and administrative expense
(223,516
)
 
(230,872
)
Net earnings from affiliates
2,615

 
1,825

Operating income
167,849

 
192,443

Interest expense
(16,283
)
 
(15,130
)
Interest income
499

 
400

Other (expense) income, net
(5,430
)
 
5,612

Earnings before income taxes
146,635

 
183,325

Provision for income taxes
(52,099
)
 
(52,725
)
Net earnings, including noncontrolling interests
94,536

 
130,600

Less: Net earnings attributable to noncontrolling interests
(913
)
 
(2,038
)
Net earnings attributable to Flowserve Corporation
$
93,623

 
$
128,562

Net earnings per share attributable to Flowserve Corporation common shareholders:
 
 
 
Basic
$
0.71

 
$
0.94

Diluted
0.70

 
0.93

Cash dividends declared per share
$
0.18

 
$
0.16


CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Amounts in thousands)
Three Months Ended September 30,
 
2015
 
2014
Net earnings, including noncontrolling interests
$
94,536

 
$
130,600

Other comprehensive loss:
 
 
 
Foreign currency translation adjustments, net of taxes of $32,543 and $60,220, respectively
(54,494
)
 
(100,195
)
Pension and other postretirement effects, net of taxes of $(1,615) and $(2,805), respectively
3,688

 
7,278

Cash flow hedging activity, net of taxes of $(663) and $1,089, respectively
1,538

 
(2,797
)
Other comprehensive loss
(49,268
)
 
(95,714
)
Comprehensive income, including noncontrolling interests
45,268

 
34,886

Comprehensive loss attributable to noncontrolling interests
(829
)
 
(1,934
)
Comprehensive income attributable to Flowserve Corporation
$
44,439

 
$
32,952


See accompanying notes to condensed consolidated financial statements.


1



FLOWSERVE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Amounts in thousands, except per share data)
Nine Months Ended September 30,
 
2015
 
2014
Sales
$
3,273,342

 
$
3,496,526

Cost of sales
(2,183,770
)
 
(2,267,609
)
Gross profit
1,089,572

 
1,228,917

Selling, general and administrative expense
(707,037
)
 
(685,277
)
Net earnings from affiliates
6,268

 
7,442

Operating income
388,803

 
551,082

Interest expense
(47,712
)
 
(45,306
)
Interest income
1,504

 
1,238

Other expense, net
(30,258
)
 
(1,129
)
Earnings before income taxes
312,337

 
505,885

Provision for income taxes
(111,525
)
 
(141,533
)
Net earnings, including noncontrolling interests
200,812

 
364,352

Less: Net earnings attributable to noncontrolling interests
(4,515
)
 
(4,544
)
Net earnings attributable to Flowserve Corporation
$
196,297

 
$
359,808

Net earnings per share attributable to Flowserve Corporation common shareholders:
 
 
 
Basic
$
1.47

 
$
2.62

Diluted
1.46

 
2.60

Cash dividends declared per share
$
0.54

 
$
0.48


CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Amounts in thousands)
Nine Months Ended September 30,
 
2015
 
2014
Net earnings, including noncontrolling interests
$
200,812

 
$
364,352

Other comprehensive loss:
 
 
 
Foreign currency translation adjustments, net of taxes of $87,943 and $53,769, respectively
(147,262
)
 
(89,462
)
Pension and other postretirement effects, net of taxes of $(5,140) and $(4,563), respectively
13,359

 
11,520

Cash flow hedging activity, net of taxes of $(218) and $1,031, respectively
(181
)
 
(2,694
)
Other comprehensive loss
(134,084
)
 
(80,636
)
Comprehensive income, including noncontrolling interests
66,728

 
283,716

Comprehensive loss attributable to noncontrolling interests
(5,909
)
 
(4,615
)
Comprehensive income attributable to Flowserve Corporation
$
60,819

 
$
279,101


See accompanying notes to condensed consolidated financial statements.


2



FLOWSERVE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in thousands, except par value)
September 30,
 
December 31,
 
2015
 
2014
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
237,842

 
$
450,350

Accounts receivable, net of allowance for doubtful accounts of $34,653 and $25,469, respectively
999,700

 
1,082,447

Inventories, net
1,116,445

 
995,564

Deferred taxes
137,773

 
158,912

Prepaid expenses and other
157,969

 
106,890

Total current assets
2,649,729

 
2,794,163

Property, plant and equipment, net of accumulated depreciation of $854,736 and $836,981, respectively
756,179

 
693,881

Goodwill
1,234,858

 
1,067,255

Deferred taxes
24,918

 
31,419

Other intangible assets, net
235,871

 
146,337

Other assets, net
256,700

 
234,965

Total assets
$
5,158,255

 
$
4,968,020

 
 
 
 
LIABILITIES AND EQUITY
Current liabilities:
 
 
 
Accounts payable
$
459,013

 
$
611,715

Accrued liabilities
772,789

 
794,072

Debt due within one year
68,893

 
53,131

Deferred taxes
13,584

 
12,957

Total current liabilities
1,314,279

 
1,471,875

Long-term debt due after one year
1,610,059

 
1,101,791

Retirement obligations and other liabilities
529,371

 
452,511

Shareholders’ equity:
 
 
 
Common shares, $1.25 par value
220,991

 
220,991

Shares authorized – 305,000
 
 
 
Shares issued – 176,793
 
 
 
Capital in excess of par value
486,787

 
495,600

Retained earnings
3,539,468

 
3,415,738

Treasury shares, at cost – 46,496 and 42,444 shares, respectively
(2,053,128
)
 
(1,830,919
)
Deferred compensation obligation
10,095

 
10,558

Accumulated other comprehensive loss
(515,890
)
 
(380,406
)
Total Flowserve Corporation shareholders’ equity
1,688,323

 
1,931,562

Noncontrolling interests
16,223

 
10,281

Total equity
1,704,546

 
1,941,843

Total liabilities and equity
$
5,158,255

 
$
4,968,020


See accompanying notes to condensed consolidated financial statements.

3



FLOWSERVE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
Nine Months Ended September 30,
 
2015
 
2014
Cash flows – Operating activities:
 
 
 
Net earnings, including noncontrolling interests
$
200,812

 
$
364,352

Adjustments to reconcile net earnings to net cash used by operating activities:
 
 
 
Depreciation
73,652

 
69,748

Amortization of intangible and other assets
25,918

 
13,555

Gain on sale of business

 
(13,403
)
Excess tax benefits from stock-based payment arrangements
(6,822
)
 
(8,490
)
Stock-based compensation
26,027

 
26,685

Foreign currency and other non-cash adjustments
54,635

 
22,174

Change in assets and liabilities, net of acquisition:
 
 
 
Accounts receivable, net
66,660

 
(38,798
)
Inventories, net
(119,530
)
 
(124,539
)
Prepaid expenses and other
(15,336
)
 
(17,568
)
Other assets, net
(17,890
)
 
(16,858
)
Accounts payable
(157,930
)
 
(88,255
)
Accrued liabilities and income taxes payable
(30,014
)
 
(50,305
)
Retirement obligations and other liabilities
(6,402
)
 
(9,651
)
       Net deferred taxes
37,261

 
1,205

Net cash flows provided by operating activities
131,041

 
129,852

Cash flows – Investing activities:
 
 
 
Capital expenditures
(138,532
)
 
(83,602
)
Payments for acquisition, net of cash acquired
(353,654
)
 

Proceeds from disposal of assets
4,103

 
1,613

Proceeds from sale of business, net of cash divested

 
46,805

Net cash flows used by investing activities
(488,083
)
 
(35,184
)
Cash flows – Financing activities:
 
 
 
Excess tax benefits from stock-based payment arrangements
6,822

 
8,490

Payments on long-term debt
(30,000
)
 
(30,000
)
Proceeds from issuance of senior notes
526,332

 

Payments of deferred loan cost
(5,108
)
 

Proceeds under other financing arrangements
8,157

 
14,388

Payments under other financing arrangements
(15,524
)
 
(16,377
)
Repurchases of common shares
(249,682
)
 
(188,324
)
Payments of dividends
(70,000
)
 
(63,287
)
Other
192

 
(2,499
)
Net cash flows provided (used) by financing activities
171,189

 
(277,609
)
Effect of exchange rate changes on cash
(26,655
)
 
(17,994
)
Net change in cash and cash equivalents
(212,508
)
 
(200,935
)
Cash and cash equivalents at beginning of period
450,350

 
363,804

Cash and cash equivalents at end of period
$
237,842

 
$
162,869


See accompanying notes to condensed consolidated financial statements.

4



FLOWSERVE CORPORATION
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1.
Basis of Presentation and Accounting Policies
Basis of Presentation
The accompanying condensed consolidated balance sheet as of September 30, 2015, the related condensed consolidated statements of income and comprehensive income for the three and nine months ended September 30, 2015 and 2014, and the condensed consolidated statements of cash flows for the nine months ended September 30, 2015 and 2014, of Flowserve Corporation are unaudited. In management’s opinion, all adjustments comprising normal recurring adjustments necessary for fair statement of such condensed consolidated financial statements have been made. Where applicable, prior period information has been updated to conform to current year presentation.
The accompanying condensed consolidated financial statements and notes in this Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2015 ("Quarterly Report") are presented as permitted by Regulation S-X and do not contain certain information included in our annual financial statements and notes thereto. Accordingly, the accompanying condensed consolidated financial information should be read in conjunction with the audited consolidated financial statements presented in our Annual Report on Form 10-K for the year ended December 31, 2014 ("2014 Annual Report").
Venezuela – Our operations in Venezuela primarily consist of a service center that performs service and repair activities. Our Venezuelan subsidiary's sales for the three and nine months ended September 30, 2015 represented less than 0.5% of consolidated sales and its assets at September 30, 2015 represented less than 0.5% of total consolidated assets. Assets primarily consisted of United States ("U.S.") dollar-denominated monetary assets and bolivar-denominated non-monetary assets at September 30, 2015. In addition, certain of our operations in other countries sell equipment and parts that are typically denominated in U.S. dollars directly to Venezuelan customers.
We have experienced delays in collecting payment on our accounts receivable from the national oil company in Venezuela, our primary Venezuelan customer. These accounts receivable are primarily U.S. dollar-denominated and are not disputed, and we have not historically had write-offs relating to this customer. Our total outstanding accounts receivable with this customer were approximately 8% of our gross accounts receivable at September 30, 2015. Given the experienced delays in collecting payments we estimate that approximately 62% of the outstanding accounts receivable will most likely not be collected within one year and therefore has been classified as long-term within other assets, net on our September 30, 2015 condensed consolidated balance sheet as compared to 48% at December 31, 2014.
At September 30, 2015 the SIMADI exchange rate was 199.4 bolivars to the U.S. dollar, compared with the official exchange rate of 6.3 bolivars to the U.S. dollar and the SICAD I exchange rate which was 13.5 bolivars to the U.S. dollar. As of March 31, 2015, we determined, based on our specific facts and circumstances, that the SIMADI exchange rate was the most appropriate for the remeasurement of our Venezuelan subsidiary's bolivar-denominated net monetary assets in U.S. dollars. As a result of the remeasurement, in the first quarter of 2015 we recognized a loss of $20.6 million of which $18.5 million was reported in other expense, net and $2.1 million in cost of goods sold in our condensed consolidated statement of income and resulted in no tax benefit.
We are continuing to assess and monitor the ongoing impact of the changes in the Venezuelan foreign exchange market on our Venezuelan operations and imports into the market, including our Venezuelan subsidiary's ability to remit cash for dividends and other payments at the SIMADI exchange rate, as well as additional government actions, political and labor unrest, or other economic conditions that may adversely impact our future consolidated financial condition or results of operations.
Accounting Policies
Significant accounting policies, for which no significant changes have occurred in the nine months ended September 30, 2015, are detailed in Note 1 to our consolidated financial statements included in our 2014 Annual Report.
Accounting Developments
Pronouncements Implemented
In June 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-11 "Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures." This ASU changes the accounting for repurchase-to-maturity transactions and linked repurchase financings so that such transactions will now be accounted for as secured borrowings. This accounting change is effective for the first interim or annual period beginning after December 15, 2014 and early adoption is not permitted. There are also new disclosure requirements in this ASU. Our adoption of ASU No. 2014-11, as of January 1, 2015, did not have an impact on our consolidated financial condition and results of operations.

5



In May 2015, the FASB issued ASU No. 2015-08, "Business Combinations (Topic 805): Pushdown Accounting - Amendments to SEC Paragraphs Pursuant to Staff Accounting Bulletin No. 115." This ASU amends various U.S. Securities and Exchange Commission ("SEC") paragraphs pursuant to the issuance Staff Accounting Bulletin No. 115. The amendments conform the Board’s guidance on pushdown accounting to that of the SEC. We adopted the amendments of this ASU immediately and it did not have an impact on our consolidated financial condition and results of operations.
In September 2015, the FASB issued ASU 2015-16, "Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments." The ASU eliminates the requirement to account for business combination measurement period adjustments retrospectively. Measurement period adjustments will now be recognized prospectively in the reporting period in which the adjustment amount is determined. The nature and amount of any measurement period adjustments recognized during the reporting period must be disclosed, including the value of the adjustment to each current period income statement line item relating to the income effects that would have been recognized in previous periods if the adjustment to provisional amounts were recognized as of the acquisition date. ASU 2015-16 is effective for periods beginning after December 15, 2015 and early adoption is permitted. We adopted the amendments of this ASU immediately and it did not have an impact on our consolidated financial condition and results of operations.
 Pronouncements Not Yet Implemented
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)" which supersedes the revenue recognition requirements in "Revenue Recognition (Topic 605)." The standard is principle-based and provides a five-step model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. There are also expanded disclosure requirements in this ASU. In August 2015, the FASB issued ASU No. 2015-14, "Revenue from Contracts with Customers (Topic 606): Deferral of Effective Date." As a result, public entities will apply the new standard for annual reporting periods beginning after December 15, 2017, including interim periods within those reporting periods. Early adoption as of the original public entity effective date is permitted. We are currently evaluating the impact of ASU No. 2014-09 on our consolidated financial condition and results of operations.
In June 2014, the FASB issued ASU No. 2014-12 "Compensation-Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period." This ASU was issued to address share-based payment awards with a performance target affecting vesting that could be achieved after the employee’s requisite service period. This ASU is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. This ASU may be applied either (a) prospectively to all awards granted or modified after the effective date or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. The adoption of ASU No. 2014-12 is not expected to have a material impact on our consolidated financial condition and results of operations.
In August 2014, the FASB issued ASU No. 2014-15, "Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern." This ASU requires management to evaluate whether there are conditions or events that raise substantial doubt about the ability of a company to continue as a going concern for one year from the date the financial statements are issued or within one year after the date that the financial statements are available to be issued when applicable. Further, the ASU provides management guidance regarding its responsibility to disclose the ability of a company to continue as a going concern in the notes to the financial statements. This ASU is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted. The adoption of ASU No. 2014-15 is not expected to have an impact on our consolidated financial condition and results of operations.
In November 2014, the FASB issued ASU 2015-01, "Income Statement - Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items." In connection with the FASB's efforts to simplify accounting standards, the FASB released new guidance on simplifying Income Statement presentation by eliminating the concept of extraordinary items from U.S. GAAP. With the issuance of this ASU the FASB determined that the elimination of the concept of extraordinary items from U.S. GAAP would reduce the cost and complexity on the application of accounting standards, while maintaining or improving the usefulness of information included in financial statements. The adoption of ASU No. 2015-01 is not expected to have an impact on our consolidated financial condition and results of operations.
In February 2015, the FASB issued ASU No. 2015-02, "Consolidation (Topic 810) - Amendments to the Consolidation Analysis,” which provides guidance on the analysis process companies must perform in order to determine whether a legal entity should be consolidated. The new ASU simplifies U.S. GAAP by eliminating entity specific consolidation guidance for limited partnerships. It also revises other aspects of the consolidation analysis, to include the ownership assessment of variable interest entities (VIEs), fee arrangements and how related parties are assessed. The amendments rescind the indefinite deferral of FASB Statement 167, Amendments to FASB Interpretation No. 46(R), for certain investment funds and replace it with a permanent scope exception for money market funds. ASU 2015-02 is effective for periods beginning after December 15, 2015. Early adoption is

6



permitted, including adoption in an interim period. We are currently evaluating the impact of ASU No. 2015-02 on our consolidated financial condition and results of operations.
In April 2015, the FASB issued ASU No. 2015-03, "Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.” The ASU was issued in connection with the FASB's efforts to simplify accounting standards for the presentation of debt issuance costs. The amendments of this ASU require companies to present debt issuance costs the same manner that present debt discounts are currently reported, as a direct deduction from the carrying value of that debt liability. The applicability of this requirement does not impact the recognition and measurement guidance for debt issuance costs. ASU 2015-03 is effective for periods beginning after December 15, 2015. Early adoption is allowed for financial statements that have yet to be issued. The adoption of ASU No. 2015-03 is not expected to have a material impact on our consolidated financial condition and results of operations.
In April 2015, the FASB issued ASU No. 2015-05, "Intangibles - Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement." The ASU provides explicit guidance about a customer's accounting for fees paid in connection with a cloud computing arrangements. ASU 2015-05 is effective for periods beginning after December 15, 2015. Early adoption is permitted. The adoption of ASU No. 2015-05 is not expected to have a material impact on our consolidated financial condition and results of operations.
In May 2015, the FASB issued ASU No. 2015-07, "Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) (a consensus of the Emerging Issues Task Force)." The ASU removes the requirement to categorize all investments for which fair value is measured using the net asset value per share practical expedient within the fair value hierarchy. ASU 2015-07 is effective for periods beginning after December 15, 2015. Early adoption is permitted. The adoption of ASU No. 2015-07 is not expected to have an impact on our consolidated financial condition and results of operations.
In July 2015, the FASB issued ASU No. 2015-11, "Inventory (Topic 330): Simplifying the Measurement of Inventory." The ASU updates represent changes to simplify the subsequent measurement of inventory. Previous to the issuance of this ASU, ASC 330 required that an entity measure inventory at the lower of cost or market. The amendments of ASU 2015-11 update narrows that “market” requirement to “net realizable value,” which is defined by the ASU as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This ASU is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2016. Application of this ASU is to be made prospectively, earlier application is permitted as of the beginning of an interim or annual reporting period. The adoption of ASU No. 2015-11 is not expected to have a material impact on our consolidated financial condition and results of operations.
In August 2015, the FASB issued ASU 2015-15, "Interest - Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements—Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting (SEC Update)." The ASU clarifies the SEC staff’s position on presenting and measuring debt issuance costs incurred in connection with line-of-credit arrangements. The SEC staff has announced that it would "not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement." The adoption of ASU No. 2015-15 is not expected to have a material impact on our consolidated financial condition and results of operations.





7



2.
Acquisitions and Disposition
SIHI Group B.V.
Effective January 7, 2015, we acquired for inclusion in Industrial Product Division ("IPD"), 100% of SIHI Group B.V. ("SIHI"), a global provider of engineered vacuum and fluid pumps and related services, primarily servicing the chemical market, as well as the pharmaceutical, food & beverage and other process industries, in a stock purchase for €286.7 million ($341.5 million based on exchange rates in effect at the time the acquisition closed and net of cash acquired) in cash. The acquisition was funded using approximately $110 million in available cash and approximately $255 million in initial borrowings from our Revolving Credit Facility, which was subsequently paid down with a portion of the net proceeds from our 2022 EUR Senior Notes (as defined and discussed in Note 5). SIHI, based in The Netherlands, has operations primarily in Europe and, to a lesser extent, the Americas and Asia.

During the first quarter of 2015, the fair value of assets acquired and liabilities assumed was recorded on a preliminary basis. During the second quarter of 2015, we recorded measurement period adjustments, primarily related to the revision of the estimated fair value of our investment in an unconsolidated joint venture, and other reclassifications that had no net impact on goodwill. These adjustments were made to the preliminary amounts recognized to reflect new information obtained about facts and circumstances that existed as of the acquisition date, that if known, would have affected the measurements of the amounts recognized at that date. There were no measurement period adjustments identified in the third quarter of 2015.

The allocation of the purchase price, including the above mentioned measurement period adjustments, is summarized below:
(Amounts in millions)
January 7, 2015 (As originally reported)
Measurement Period Adjustments
January 7, 2015 (As adjusted)
Accounts receivable
$
56.2

$
3.1

$
59.3

Inventories
74.0


74.0

Prepaid expenses and other
17.2

0.5

17.7

Total current assets
147.4

3.6

151.0

Intangible assets
 




Trademarks
20.9


20.9

Existing customer relationships
45.3


45.3

Backlog
8.5


8.5

Engineering drawings and other
3.9


3.9

Total intangible assets
78.6


78.6

Property, plant and equipment
87.5

7.0

94.5

Long-term deferred tax asset
10.7

1.0

11.7

Investments in affiliates
11.6

(4.3
)
7.3

Total assets
335.8

7.3

343.1

Current liabilities
(87.0
)
(1.0
)
(88.0
)
Noncurrent liabilities
(101.7
)
(13.0
)
(114.7
)
Net assets
147.1

(6.7
)
140.4

Goodwill
194.4

6.7

201.1

Purchase price, net of cash acquired of $23.4 million
$
341.5

$

$
341.5

The excess of the acquisition date fair value of the total purchase price over the estimated fair value of the net assets was recorded as goodwill. Goodwill of $201.1 million represents the value expected to be obtained from strengthening Flowserve’s portfolio of products and services through the addition of SIHI's engineered vacuum and fluid pumps, as well as the associated aftermarket services and parts. The goodwill related to this acquisition is recorded in the IPD segment and is not expected to be deductible for tax purposes. The trademarks are primarily indefinite-lived intangibles. As of date of acquisition existing customer relationships, engineering drawings and backlog had expected weighted average useful lives of 10 years, 10 years and less than one year, respectively. In total, amortizable intangible assets have a weighted average useful live of approximately 9 years.

8



Subsequent to January 7, 2015, the revenues and expenses of SIHI have been included in our condensed consolidated statement of income. The SIHI acquisition generated sales of approximately $74 million and $218 million and impacted net earnings by less than $0.1 million and $(38) million for the three and nine months ended September 30, 2015, respectively. SIHI's sales (unaudited) were approximately €270 million during its fiscal year ended November 30, 2014. No proforma financial information has been presented due to immateriality.
Naval OY
Effective March 31, 2014, we sold our Flow Control Division's ("FCD") Naval OY ("Naval") business to a Finnish valve manufacturer. The sale included Naval's manufacturing facility located in Laitila, Finland and a service and support center located in St. Petersburg, Russia. The cash proceeds for the sale totaled $46.8 million, net of cash divested, and resulted in a $13.4 million pre-tax gain recorded in selling, general and administrative expense in the condensed consolidated statements of income. Net sales related to the Naval business totaled $8.2 million in the first quarter of 2014.
3.
Stock-Based Compensation Plans
We maintain the Flowserve Corporation Equity and Incentive Compensation Plan (the "2010 Plan"), which is a shareholder-approved plan authorizing the issuance of up to 8,700,000 shares of our common stock in the form of restricted shares, restricted share units and performance-based units (collectively referred to as "Restricted Shares"), incentive stock options, non-statutory stock options, stock appreciation rights and bonus stock. Of the 8,700,000 shares of common stock authorized under the 2010 Plan, 4,179,568 were available for issuance as of September 30, 2015. The Flowserve Corporation 2004 Stock Compensation Plan expired on June 22, 2014, with 827,835 shares unissued. No stock options have been granted since 2006.
 Restricted Shares – Awards of Restricted Shares are valued at the closing market price of our common stock on the date of grant. The unearned compensation is amortized to compensation expense over the vesting period of the restricted shares. We had unearned compensation of $38.4 million and $30.6 million at September 30, 2015 and December 31, 2014, respectively, which is expected to be recognized over a weighted-average period of approximately one year. These amounts will be recognized into net earnings in prospective periods as the awards vest. The total fair value of Restricted Shares vested during the three months ended September 30, 2015 and 2014 was $1.3 million and less than $0.1 million, respectively. The total fair value of Restricted Shares vested during the nine months ended September 30, 2015 and 2014 was $40.7 million and $34.5 million, respectively
We recorded stock-based compensation expense of $5.7 million ($8.6 million pre-tax) and $5.5 million ($8.4 million pre-tax) for the three months ended September 30, 2015 and 2014, respectively. We recorded stock-based compensation expense of $17.2 million ($26.0 million pre-tax) and $17.6 million ($26.7 million pre-tax) for the nine months ended September 30, 2015 and 2014, respectively.
The following table summarizes information regarding Restricted Shares:
 
Nine Months Ended September 30, 2015
 
Shares
 
Weighted Average
Grant-Date Fair
Value
Number of unvested shares:
 
 
 
Outstanding - January 1, 2015
1,856,548

 
$
52.29

Granted
750,669

 
53.82

Vested
(949,470
)
 
42.84

Canceled
(130,676
)
 
60.59

Outstanding - September 30, 2015
1,527,071

 
$
58.21


Unvested Restricted Shares outstanding as of September 30, 2015, includes approximately 813,000 units with performance-based vesting provisions. Performance-based units are issuable in common stock and vest upon the achievement of pre-defined performance targets, primarily based on our average annual return on net assets over a three-year period as compared with the same measure for a defined peer group for the same period. Most units were granted in three annual grants since January 1, 2013 and have a vesting percentage between 0% and 200% depending on the achievement of the specific performance targets. Compensation expense is recognized ratably over a cliff-vesting period of 36 months, based on the fair market value of our common stock on the date of grant, as adjusted for anticipated forfeitures. During the performance period, earned and unearned compensation expense is adjusted based on changes in the expected achievement of the performance targets. Vesting provisions range from 0 to approximately 1,486,000 shares based on performance targets. As of September 30, 2015, we estimate vesting of approximately 971,000 shares based on expected achievement of performance targets.

9



4.
Derivative Instruments and Hedges
Our risk management and foreign currency derivatives and hedging policy specifies the conditions under which we may enter into derivative contracts. See Notes 1 and 6 to our consolidated financial statements included in our 2014 Annual Report and Note 6 of this Quarterly Report for additional information on our derivatives. We enter into foreign exchange forward and swap contracts to hedge our cash flow risks associated with transactions denominated in currencies other than the local currency of the operation engaging in the transaction. All designated foreign exchange hedging instruments are highly effective as of September 30, 2015.
Foreign exchange contracts designated as hedging instruments had a notional value of $42.7 million and $125.9 million, at September 30, 2015 and December 31, 2014, respectively. Foreign exchange contracts with third parties not designated as hedging instruments had a notional value of $528.1 million and $421.1 million, at September 30, 2015 and December 31, 2014, respectively. At September 30, 2015, the length of foreign exchange contracts currently in place ranged from one day to 28 months.
Previously, as part of our risk management program, we entered into interest rate swap agreements to hedge exposure to floating interest rates on certain portions of our debt. At September 30, 2015 we had no notional amount in outstanding interest rate swaps with third parties, compared to $40.0 million as of December 31, 2014.
We are exposed to risk from credit-related losses resulting from nonperformance by counterparties to our financial instruments. We perform credit evaluations of our counterparties under foreign exchange contracts and interest rate swap agreements and expect all counterparties to meet their obligations. We have not experienced credit losses from our counterparties.
The fair value of foreign exchange contracts not designated as hedging instruments are summarized below:
 
September 30,
 
December 31,
(Amounts in thousands)
2015
 
2014
Current derivative assets
$
3,546

 
$
11,709

Noncurrent derivative assets
3

 
6

Current derivative liabilities
3,200

 
6,168

Noncurrent derivative liabilities
219

 
348


The fair value of interest rate swaps and foreign exchange contracts designated as hedging instruments are summarized below:
 
September 30,
 
December 31,
(Amounts in thousands)
2015
 
2014
Current derivative assets
$
164

 
$

Current derivative liabilities
$
3,236

 
$
6,952

Noncurrent derivative liabilities
28

 
411

Current and noncurrent derivative assets are reported in our condensed consolidated balance sheets in prepaid expenses and other and other assets, net, respectively. Current and noncurrent derivative liabilities are reported in our condensed consolidated balance sheets in accrued liabilities and retirement obligations and other liabilities, respectively.
The impact of net changes in the fair values of foreign exchange contracts are summarized below:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(Amounts in thousands)
2015
 
2014
 
2015
 
2014
Gain recognized in income
$
4,391

 
$
1,615

 
$
31,372

 
$
1,738

Gains and losses recognized in our condensed consolidated statements of income for foreign exchange contracts are classified as other expense, net.
In March 2015, we designated €255.7 million of our €500.0 million Euro senior notes discussed in Note 5 as a net investment hedge of our investments in certain of our international subsidiaries that use the Euro as their functional currency. We used the spot method to measure the effectiveness of our net investment hedge. Under this method, for each reporting period, the change in the carrying value of the Euro senior notes due to remeasurement of the effective portion is reported in accumulated other comprehensive loss on our condensed consolidated balance sheet and the remaining change in the carrying value of the ineffective portion, if any, is recognized in other expense, net in our condensed statement of income. We evaluate the effectiveness of our net

10



investment hedge on a prospective basis at the beginning of each quarter. We did not record any ineffectiveness for the three and nine months ended September 30, 2015.

5.
Debt
Debt, including capital lease obligations, consisted of:
 
September 30,
 
  December 31,  
(Amounts in thousands, except percentages)
2015
 
2014
1.25% EUR Senior Notes due March 17, 2022, net of unamortized discount
$
555,364

 
$

4.00% USD Senior Notes due November 15, 2023, net of unamortized discount
298,822

 
298,731

3.50% USD Senior Notes due September 15, 2022, net of unamortized discount
498,591

 
498,460

Term Loan Facility, interest rate of 1.58% at September 30, 2015 and 1.51% at December 31, 2014
300,000

 
330,000

Capital lease obligations and other borrowings
26,175

 
27,731

Debt and capital lease obligations
1,678,952

 
1,154,922

Less amounts due within one year
68,893

 
53,131

Total debt due after one year
$
1,610,059

 
$
1,101,791


Senior Notes
On March 17, 2015, we completed a public offering of €500.0 million of Euro senior notes in aggregate principal amount due March 17, 2022 ("2022 EUR Senior Notes"). The 2022 EUR Senior Notes bear an interest rate of 1.25% per year, payable each year on March 17, commencing on March 17, 2016. The 2022 EUR Senior Notes were priced at 99.336% of par value, reflecting a discount to the aggregate principal amount. The proceeds of the offering were €496.7 million ($526.3 million based on exchange rates in effect at the time the offering closed). We used a portion of the proceeds of the 2022 EUR Senior Notes to ultimately fund the acquisition of SIHI described in Note 2 and anticipate utilizing the remaining portion for other general corporate purposes.

Senior Credit Facility
As discussed in Note 10 to our consolidated financial statements included in our 2014 Annual Report, our credit agreement provides for a $400.0 million term loan (“Term Loan Facility”) and a $1.0 billion revolving credit facility (“Revolving Credit Facility” and, together with the Term Loan Facility, the “Senior Credit Facility”). On October 14, 2015 we amended our existing credit agreement. The significant amendments extend the maturity of our Senior Credit Facility by two years to October 14, 2020, lower the sublimits for the issuance of letters of credit and reduce the commitment fee to 0.15% on the daily unused portions of the Senior Credit Facility. The amended Senior Credit Facility also increases the maximum permitted leverage ratio from 3.25 to 3.5 times debt to total Consolidated EBITDA (as defined in the Senior Credit Facility). Pursuant to the terms of the amended Senior Credit Facility and the indentures governing the Senior Notes, our obligations will no longer carry a conditional guarantee by certain of our 100% owned domestic subsidiaries.  Subject to certain conditions, we have the right to increase the amount of the Term Loan Facility or the Revolving Credit Facility by an aggregate amount not to exceed $400.0 million. All other significant existing terms under the credit agreement remained unchanged.
As of September 30, 2015 and December 31, 2014, we had no amounts outstanding under the Revolving Credit Facility. We had outstanding letters of credit of $96.9 million and $76.8 million at September 30, 2015 and December 31, 2014, respectively, which reduced our borrowing capacity to $903.1 million and $923.2 million, respectively. Our compliance with applicable financial covenants under the Senior Credit Facility is tested quarterly, and we complied with all applicable covenants at September 30, 2015.
We may prepay loans under our Senior Credit Facility in whole or in part, without premium or penalty, at any time. A commitment fee, which is payable quarterly on the daily unused portions of the Senior Credit Facility, was 0.175% (per annum) during the period ended September 30, 2015 (as noted above the commitment fee decreased to 0.15% effective October 14, 2015). During the nine months ended September 30, 2015, we made scheduled repayments of $30.0 million under our Term Loan Facility. We have scheduled repayments of $15.0 million due in each of the next four quarters on our Term Loan Facility. As a result of extending the maturity of our Term Loan by two years we have scheduled repayments of $60.0 million in each of 2018 and 2019, and $45 million in 2020.
Our Senior Notes and Senior Credit Facility were fully and unconditionally and jointly and severally guaranteed by certain of our 100% owned domestic subsidiaries. Pursuant to the terms of the Senior Credit Facility and the indentures governing the Senior Notes, any guarantees on our obligations were subject to release if the Company satisfactorily achieved and met the following guaranty release conditions: (a) obtains a ratings of BBB (stable outlook) or better from S&P and Baa2 (stable outlook) or better from Moody’s and (b) our domestic subsidiaries do not guarantee any material indebtedness. On February 27, 2015 Standard & Poor's Ratings Services raised its corporate credit and senior unsecured debt rating on the Company to BBB from BBB-, with a stable outlook. As of March 11, 2015 Moody’s Investors Services' corporate credit and senior unsecured debt rating on the Company was Baa2, with a stable outlook. As a result, the guarantees of the Senior Notes and Senior Credit Facility were released as of March 26, 2015 upon the discharge of the terms of the note indentures and Senior Credit Facility agreement; therefore, the Company is exempt from disclosing supplemental guarantor financial information in accordance with Rule 3-10 of Regulation S-X, promulgated under the Securities Act of 1933.


6.
Fair Value
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models may be applied. Assets and liabilities recorded at fair value in our condensed consolidated balance sheets are categorized by hierarchical levels based upon the level of judgment associated with the inputs used to measure their fair values. Recurring fair value measurements are limited to investments in derivative instruments. The fair value measurements of our derivative instruments are determined using models that maximize the use of the observable market inputs including interest rate curves and both forward and spot prices for currencies, and are classified as Level II under the fair value hierarchy. The fair values of our derivatives are included in Note 4.
Our financial instruments are presented at fair value in our condensed consolidated balance sheets, with the exception of our long-term debt. The estimated fair value of our long-term debt, excluding the Senior Notes, approximates the carrying value and is classified as Level II under the fair value hierarchy. The carrying value of our debt is included in Note 5. The estimated fair value of our Senior Notes at September 30, 2015 was $1,320.8 million compared to the carrying value of $1,352.8 million. The estimated fair value of the Senior Notes is based on Level I quoted market rates. The carrying amounts of our other financial instruments (e.g., cash and cash equivalents, accounts receivable, net, accounts payable and short-term debt) approximated fair value due to their short-term nature at September 30, 2015 and December 31, 2014.
7.
Inventories
Inventories, net consisted of the following:
 
September 30,
 
  December 31,  
(Amounts in thousands)
2015
 
2014
Raw materials
$
432,423

 
$
352,928

Work in process
786,259

 
687,343

Finished goods
250,359

 
265,439

Less: Progress billings
(271,231
)
 
(230,058
)
Less: Excess and obsolete reserve
(81,365
)
 
(80,088
)
Inventories, net
$
1,116,445

 
$
995,564



11



8.
Earnings Per Share
The following is a reconciliation of net earnings of Flowserve Corporation and weighted average shares for calculating net earnings per common share. Earnings per weighted average common share outstanding was calculated as follows:
 
Three Months Ended September 30,
(Amounts in thousands, except per share data)
2015
 
2014
Net earnings of Flowserve Corporation
$
93,623

 
$
128,562

Dividends on restricted shares not expected to vest
3

 
3

Earnings attributable to common and participating shareholders
$
93,626

 
$
128,565

Weighted average shares:
 
 
 
Common stock
132,036

 
136,100

Participating securities
514

 
567

Denominator for basic earnings per common share
132,550

 
136,667

Effect of potentially dilutive securities
610

 
862

Denominator for diluted earnings per common share
133,160

 
137,529

Earnings per common share:
 
 
 
Basic
$
0.71

 
$
0.94

Diluted
0.70

 
0.93

 
Nine Months Ended September 30,
(Amounts in thousands, except per share data)
2015
 
2014
Net earnings of Flowserve Corporation
$
196,297

 
$
359,808

Dividends on restricted shares not expected to vest
9

 
9

Earnings attributable to common and participating shareholders
$
196,306

 
$
359,817

Weighted average shares:
 
 
 
Common stock
133,389

 
136,612

Participating securities
513

 
584

Denominator for basic earnings per common share
133,902

 
137,196

Effect of potentially dilutive securities
747

 
936

Denominator for diluted earnings per common share
134,649

 
138,132

Earnings per common share:
 
 
 
Basic
$
1.47

 
$
2.62

Diluted
1.46

 
2.60

Diluted earnings per share above is based upon the weighted average number of shares as determined for basic earnings per share plus shares potentially issuable in conjunction with stock options and Restricted Shares.

9.
Legal Matters and Contingencies
Asbestos-Related Claims
We are a defendant in a substantial number of lawsuits that seek to recover damages for personal injury allegedly caused by exposure to asbestos-containing products manufactured and/or distributed by our heritage companies in the past. While the overall number of asbestos-related claims has generally declined in recent years, there can be no assurance that this trend will continue, or that the average cost per claim will not further increase. Asbestos-containing materials incorporated into any such products were encapsulated and used as internal components of process equipment, and we do not believe that any significant emission of asbestos fibers occurred during the use of this equipment.
Our practice is to vigorously contest and resolve these claims, and we have been successful in resolving a majority of claims with little or no payment. Historically, a high percentage of resolved claims have been covered by applicable insurance or indemnities from other companies, and we believe that a substantial majority of existing claims should continue to be covered by

12



insurance or indemnities. Accordingly, we have recorded a liability for our estimate of the most likely settlement of asserted claims and a related receivable from insurers or other companies for our estimated recovery, to the extent we believe that the amounts of recovery are probable and not otherwise in dispute. While unfavorable rulings, judgments or settlement terms regarding these claims could have a material adverse impact on our business, financial condition, results of operations and cash flows, we currently believe the likelihood is remote.
Additionally, we have claims pending against certain insurers that, if resolved more favorably than reflected in the recorded receivables, would result in discrete gains in the applicable quarter. We are currently unable to estimate the impact, if any, of unasserted asbestos-related claims, although future claims would also be subject to then existing indemnities and insurance coverage.
United Nations Oil-for-Food Program
In mid-2006, the French authorities began an investigation of over 170 French companies, of which one of our French subsidiaries was included, concerning suspected inappropriate activities conducted in connection with the United Nations Oil for Food Program. As previously disclosed, the French investigation of our French subsidiary was formally opened in the first quarter of 2010, and our French subsidiary filed a formal response with the French court. In July 2012, the French court ruled against our procedural motions to challenge the constitutionality of the charges and quash the indictment. Hearings occurred on April 1-2, 2015, and the Company presented its defense and closing arguments. On June 18, 2015, the French court issued its ruling dismissing the case against the Company and the other defendants. However, on July 1, 2015, the French prosecutor lodged an appeal. We currently do not expect to incur additional case resolution costs of a material amount in this matter. However, if the French authorities ultimately take enforcement action against our French subsidiary regarding its investigation, we may be subject to monetary and non-monetary penalties, which we currently do not believe will have a material adverse financial impact on our company.
Other
We are currently involved as a potentially responsible party at five former public waste disposal sites in various stages of evaluation or remediation. The projected cost of remediation at these sites, as well as our alleged "fair share" allocation, will remain uncertain until all studies have been completed and the parties have either negotiated an amicable resolution or the matter has been judicially resolved. At each site, there are many other parties who have similarly been identified. Many of the other parties identified are financially strong and solvent companies that appear able to pay their share of the remediation costs. Based on our information about the waste disposal practices at these sites and the environmental regulatory process in general, we believe that it is likely that ultimate remediation liability costs for each site will be apportioned among all liable parties, including site owners and waste transporters, according to the volumes and/or toxicity of the wastes shown to have been disposed of at the sites. We believe that our financial exposure for existing disposal sites will not be materially in excess of accrued reserves.
As previously disclosed in our 2014 Annual Report, we terminated an employee of an overseas subsidiary after uncovering actions that violated our Code of Business Conduct and may have violated the Foreign Corrupt Practices Act.  We completed our internal investigation into the matter, self-reported the potential violation to the United States Department of Justice (the “DOJ”) and the SEC, and continue to cooperate with the DOJ and SEC.  We previously received a subpoena from the SEC requesting additional information and documentation related to the matter and are in the process of responding.  We currently believe that this matter will not have a material adverse financial impact on the Company, but there can be no assurance that the Company will not be subjected to monetary penalties and additional costs. 
  We are also a defendant in a number of other lawsuits, including product liability claims, that are insured, subject to the applicable deductibles, arising in the ordinary course of business, and we are also involved in other uninsured routine litigation incidental to our business. We currently believe none of such litigation, either individually or in the aggregate, is material to our business, operations or overall financial condition. However, litigation is inherently unpredictable, and resolutions or dispositions of claims or lawsuits by settlement or otherwise could have an adverse impact on our financial position, results of operations or cash flows for the reporting period in which any such resolution or disposition occurs.
Although none of the aforementioned potential liabilities can be quantified with absolute certainty except as otherwise indicated above, we have established reserves covering exposures relating to contingencies, to the extent believed to be reasonably estimable and probable based on past experience and available facts. While additional exposures beyond these reserves could exist, they currently cannot be estimated. We will continue to evaluate and update the reserves as necessary and appropriate.


13



10.
Retirement and Postretirement Benefits
Components of the net periodic cost for retirement and postretirement benefits for the three months ended September 30, 2015 and 2014 were as follows:
 
U.S.
Defined Benefit Plans
 
Non-U.S.
Defined Benefit Plans
 
Postretirement
Medical Benefits
(Amounts in millions) 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
Service cost
$
6.0

 
$
5.7

 
$
2.1

 
$
1.7

 
$

 
$

Interest cost
4.3

 
4.4

 
3.1

 
3.7

 
0.3

 
0.3

Expected return on plan assets
(6.0
)
 
(5.5
)
 
(3.0
)
 
(2.7
)
 

 

Amortization of prior service cost
0.1

 
0.2

 

 
0.1

 

 

Amortization of unrecognized net loss (gain)
2.3

 
2.1

 
1.3

 
1.7

 
(0.1
)
 
(0.3
)
Net periodic cost recognized
$
6.7

 
$
6.9

 
$
3.5

 
$
4.5

 
$
0.2

 
$


Components of the net periodic cost for retirement and postretirement benefits for the nine months ended September 30, 2015 and 2014 were as follows:
 
U.S.
Defined Benefit Plans
 
Non-U.S.
Defined Benefit Plans
 
Postretirement
Medical Benefits
(Amounts in millions) 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
Service cost
$
18.1

 
$
17.2

 
$
6.3

 
$
5.2

 
$

 
$

Interest cost
12.8

 
13.1

 
9.3

 
11.1

 
0.9

 
0.9

Expected return on plan assets
(18.1
)
 
(16.5
)
 
(9.0
)
 
(8.0
)
 

 

Amortization of prior service cost
0.3

 
0.4

 

 
0.2

 
0.1

 

Amortization of unrecognized net loss (gain)
6.9

 
6.3

 
3.9

 
5.1

 
(0.4
)
 
(0.9
)
Net periodic cost recognized
$
20.0

 
$
20.5

 
$
10.5

 
$
13.6

 
$
0.6

 
$


11.
Shareholders’ Equity
Dividends – On February 16, 2015, our Board of Directors authorized an increase in the payment of quarterly dividends on our common stock from $0.16 per share to $0.18 per share payable beginning on April 10, 2015. On February 17, 2014, our Board of Directors authorized an increase in the payment of quarterly dividends on our common stock from $0.14 per share to $0.16 per share payable quarterly beginning on April 11, 2014. Generally, our dividend date-of-record is in the last month of the quarter, and the dividend is paid the following month. Any subsequent dividends will be reviewed by our Board of Directors and declared in its discretion dependent on its assessment of our financial situation and business outlook at the applicable time.
Share Repurchase Program – On November 13, 2014, our Board of Directors approved a $500.0 million share repurchase authorization, which included approximately $175 million of remaining capacity under the prior $750.0 million share repurchase authorization. Our share repurchase program does not have an expiration date, and we reserve the right to limit or terminate the repurchase program at anytime without notice.
We repurchased 2,378,700 shares of our outstanding common stock for $110.0 million, and 475,177 shares for $35.3 million, during the three months ended September 30, 2015 and 2014, respectively. We repurchased 4,833,146 shares of our outstanding common stock for $249.7 million, and 2,485,481 shares for $188.3 million, during the nine months ended September 30, 2015 and 2014, respectively. As of September 30, 2015, we had $214.7 million of remaining capacity under our current share repurchase program.

14



12.
Income Taxes
For the three months ended September 30, 2015, we earned $146.6 million before taxes and provided for income taxes of $52.1 million resulting in an effective tax rate of 35.5%. For the nine months ended September 30, 2015, we earned $312.3 million before taxes and provided for income taxes of $111.5 million resulting in an effective tax rate of 35.7%. The effective tax rate varied from the U.S. federal statutory rate for the three months ended September 30, 2015 primarily due to the net impact of foreign operations and the establishment of a valuation allowance against our deferred tax assets in Brazil in the amount of $10.0 million. The effective tax rate varied from the U.S. federal statutory rate for the nine months ended September 30, 2015 primarily due to tax impacts of the realignment programs, the Venezuelan exchange rate remeasurement loss and the establishment of a valuation allowance of $10.0 million against our deferred tax assets in Brazil, partially offset by the net impact of foreign operations.
For the three months ended September 30, 2014, we earned $183.3 million before taxes and provided for income taxes of $52.7 million, resulting in an effective tax rate of 28.8%. For the nine months ended September 30, 2014, we earned $505.9 million before taxes and provided for income taxes of $141.5 million, resulting in an effective tax rate of 28.0%. The effective tax rate varied from the U.S. federal statutory rate for the three and nine months ended September 30, 2014 primarily due to the net impact of foreign operations.
As of September 30, 2015, the amount of unrecognized tax benefits increased by $11.7 million from December 31, 2014. With limited exception, we are no longer subject to U.S. federal income tax audits for years through 2013, state and local income tax audits for years through 2009 or non-U.S. income tax audits for years through 2008. We are currently under examination for various years in Austria, Germany, India, Italy, Singapore, Spain, the U.S. and Venezuela.
It is reasonably possible that within the next 12 months the effective tax rate will be impacted by the resolution of some or all of the matters audited by various taxing authorities. It is also reasonably possible that we will have the statute of limitations close in various taxing jurisdictions within the next 12 months. As such, we estimate we could record a reduction in our tax expense of approximately $10 million within the next 12 months.

15



13.
Segment Information
During the first quarter of 2015, we made composition changes to our Engineered Product Division ("EPD") and IPD reportable segments to take into consideration the acquisition of SIHI that was finalized on January 7, 2015. Effective January 1, 2015, certain activities, primarily related to engineered pumps and seals, that were previously included in the IPD business segment will now be reported in the EPD business segment. These changes did not materially impact segment results or segment assets. We did not change our business segments, management structure, chief operating decision maker or how we evaluate segment performance and allocate resources. Prior periods were retrospectively adjusted to conform to the new reportable segment composition. The following is a summary of the financial information of the reportable segments reconciled to the amounts reported in the condensed consolidated financial statements:
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2015
 
 
 
 
 
 
 
 
 
 
 (Amounts in thousands)
Engineered Product Division
 
Industrial Product Division
 
Flow Control Division
 
Subtotal–Reportable Segments
 
Eliminations and All Other
 
Consolidated Total
Sales to external customers
$
502,208

 
$
227,502

 
$
366,766

 
$
1,096,476

 
$

 
$
1,096,476

Intersegment sales
12,298

 
14,137

 
1,168

 
27,603

 
(27,603
)
 

Segment operating income
78,342

 
24,985

 
77,063

 
180,390

 
(12,541
)
 
167,849

 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2014
 
 
 
 
 
 
 
 
 
 
 (Amounts in thousands)
Engineered Product Division
 
Industrial Product Division
 
Flow Control Division
 
Subtotal–Reportable Segments
 
Eliminations and All Other
 
Consolidated Total
Sales to external customers
$
625,945

 
$
192,655

 
$
385,412

 
$
1,204,012

 
$

 
$
1,204,012

Intersegment sales
15,537

 
10,482

 
1,545

 
27,564

 
(27,564
)
 

Segment operating income
110,345

 
26,937

 
72,301

 
209,583

 
(17,140
)
 
192,443

 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2015
 
 
 
 
 
 
 
 
 
 
 (Amounts in thousands)
Engineered Product Division
 
Industrial Product Division
 
Flow Control Division
 
Subtotal–Reportable Segments
 
Eliminations and All Other
 
Consolidated Total
Sales to external customers
$
1,533,955

 
$
690,873

 
$
1,048,514

 
$
3,273,342

 
$

 
$
3,273,342

Intersegment sales
35,479

 
34,948

 
2,945

 
73,372

 
(73,372
)
 

Segment operating income
233,264

 
18,716

 
186,266

 
438,246

 
(49,443
)
 
388,803

 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2014
 
 
 
 
 
 
 
 
 
 
 (Amounts in thousands)
Engineered Product Division
 
Industrial Product Division
 
Flow Control Division
 
Subtotal–Reportable Segments
 
Eliminations and All Other
 
Consolidated Total
Sales to external customers
$
1,762,600

 
$
562,031

 
$
1,171,895

 
$
3,496,526

 
$

 
$
3,496,526

Intersegment sales
43,147

 
31,121

 
4,421

 
78,689

 
(78,689
)
 

Segment operating income
300,484

 
75,901

 
234,560

 
610,945

 
(59,863
)
 
551,082




16



14. Accumulated Other Comprehensive Loss
The following table presents the changes in accumulated other comprehensive loss ("AOCL"), net of tax for the three months ended September 30, 2015 and 2014:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2015
 
2014
(Amounts in thousands)
Foreign currency translation items(1)
 
Pension and other post-retirement effects
 
Cash flow hedging activity
 
Total(1)
 
Foreign currency translation items(1)
 
Pension and other post-retirement effects
 
Cash flow hedging activity
 
Total(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance - July 1
$
(331,301
)
 
$
(125,727
)
 
$
(6,929
)
 
$
(463,957
)
 
$
(79,220
)
 
$
(125,286
)
 
$
(711
)
 
$
(205,217
)
Other comprehensive (loss) income before reclassifications
(54,494
)
 
1,245

 
(35
)
 
(53,284
)
 
(100,195
)
 
4,710

 
(2,804
)
 
(98,289
)
Amounts reclassified from AOCL

 
2,443

 
1,573

 
4,016

 

 
2,568

 
7

 
2,575

Net current-period other comprehensive (loss) income
(54,494
)
 
3,688

 
1,538

 
(49,268
)
 
(100,195
)
 
7,278

 
(2,797
)
 
(95,714
)
Balance - September 30
$
(385,795
)
 
$
(122,039
)
 
$
(5,391
)
 
$
(513,225
)
 
$
(179,415
)
 
$
(118,008
)
 
$
(3,508
)
 
$
(300,931
)
_______________________________________
(1) Includes foreign currency translation adjustments attributable to noncontrolling interests of $1.4 million and $1.3 million at July 1, 2015 and 2014, $2.7 million and $1.3 million at September 30, 2015 and 2014, respectively. Includes net investment hedge losses of $0.7 million, net of deferred taxes, for the three months ended September 30, 2015. Amounts in parentheses indicate debits.
 
 
 
 
 
 
The following table presents the reclassifications out of AOCL:
 
 
 
 
 
 
 
Three Months Ended September 30,
(Amounts in thousands)
Affected line item in the statement of income
 
2015(1)
 
2014(1)
Cash flow hedging activity
 
 
 
 
 
Foreign exchange contracts
Sales
 
$
(1,990
)
 
$
(15
)
 
Tax benefit
 
417

 
8

 
 Net of tax
 
$
(1,573
)
 
$
(7
)
 
 
 
 
 
 
Pension and other postretirement effects
 
 
 
 
 
Amortization of actuarial losses(2)
 
 
$
(3,465
)
 
$
(3,516
)
  Prior service costs(2)
 
 
(177
)
 
(169
)


Tax benefit
 
1,199

 
1,117



Net of tax
 
$
(2,443
)
 
$
(2,568
)
_______________________________________
(1) Amounts in parentheses indicate decreases to income. None of the reclass amounts have a noncontrolling interest component.
(2) These accumulated other comprehensive loss components are included in the computation of net periodic pension cost. See Note 10 for additional details.






17







The following table presents the changes in accumulated other comprehensive loss ("AOCL"), net of tax for the nine months ended September 30, 2015 and 2014:
 
2015
 
2014
(Amounts in thousands)
Foreign currency translation items(1)
 
Pension and other post-retirement effects
 
Cash flow hedging activity
 
Total(1)
 
Foreign currency translation items(1)
 
Pension and other post-retirement effects
 
Cash flow hedging activity
 
Total(1)
Balance - January 1
$
(238,533
)
 
$
(135,398
)
 
$
(5,210
)
 
$
(379,141
)
 
$
(89,953
)
 
$
(129,528
)
 
$
(814
)
 
$
(220,295
)
Other comprehensive (loss) income before reclassifications
(147,262
)
 
6,031

 
(6,739
)
 
(147,970
)
 
(91,239
)
 
3,816

 
(2,947
)
 
(90,370
)
Amounts reclassified from AOCL

 
7,328

 
6,558

 
13,886

 
1,777

 
7,704

 
253

 
9,734

Net current-period other comprehensive (loss) income
(147,262
)
 
13,359

 
(181
)
 
(134,084
)
 
(89,462
)
 
11,520

 
(2,694
)
 
(80,636
)
Balance - September 30
$
(385,795
)
 
$
(122,039
)
 
$
(5,391
)
 
$
(513,225
)
 
$
(179,415
)
 
$
(118,008
)
 
$
(3,508
)
 
$
(300,931
)
_______________________________________
(1) Includes foreign currency translation adjustments attributable to noncontrolling interests of $1.3 million and $1.2 million at January 1, 2015 and 2014 and $2.7 million and $1.3 million at September 30, 2015 and 2014, respectively. Includes net investment hedge losses of $9.3 million, net of deferred taxes, for the nine months ended September 30, 2015. Amounts in parentheses indicate debits.


18



The following table presents the reclassifications out of AOCL:
 
 
 
 
Nine Months Ended September 30,
(Amounts in thousands)
 
Affected line item in the statement of income
 
2015(1)
 
2014(1)
Foreign currency translation items
 
 
 
 
 
 
Release of cumulative translation adjustments due to sale of business(2)
 
Selling, general and administrative expense
 
$

 
$
(1,777
)
 
 
Tax benefit
 

 

 
 
 Net of tax
 
$

 
$
(1,777
)
 
 
 
 
 
 
 
Cash flow hedging activity
 
 
 
 
 
 
   Foreign exchange contracts
 
Other expense, net
 
$
(3,327
)
 
$

 
 
Sales
 
(5,694
)
 
(406
)
 
 
Tax benefit
 
2,463

 
153

 
 
 Net of tax
 
$
(6,558
)
 
$
(253
)
 
 
 
 
 
 
 
Pension and other postretirement effects
 
 
 
 
 
 
Amortization of actuarial losses(3)
 
 
 
$
(10,396
)
 
$
(10,547
)
Prior service costs(3)
 
 
 
(530
)
 
(508
)
 
 
Tax benefit
 
3,598

 
3,351

 
 
Net of tax
 
$
(7,328
)
 
$
(7,704
)
_______________________________________
(1) Amounts in parentheses indicate decreases to income. None of the reclass amounts have a noncontrolling interest component.
(2)
Previously disclosed as $(5.5) million in 2014. No incremental impact on our consolidated financial condition or result of operation.
(3) These accumulated other comprehensive loss components are included in the computation of net periodic pension cost. See Note 10 for additional details.

At September 30, 2015, we expect to recognize a loss of $3.7 million, net of deferred taxes, into earnings in the next twelve months related to designated cash flow hedges based on their fair values at September 30, 2015.
15. Realignment Programs
In the first quarter of 2015, we initiated a realignment program ("R1 Realignment Program") to reduce and optimize certain non-strategic QRCs and manufacturing facilities from the SIHI acquisition. We anticipate a total investment in this program of approximately $50 million of which approximately $40 million is related to identified initiatives and is primarily restructuring, including related severance costs and primarily incurred by IPD. Realignment charges of $0.1 million were recorded in IPD for the three months ended September 30, 2015. Realignment charges of $29.0 million were recorded in IPD, $0.7 million in EPD and $5.5 million was reported in income tax expense in our condensed consolidated statement of income for the nine months ended September 30, 2015. We anticipate that the majority of any remaining charges will be incurred through the remainder of 2015 and 2016.
In the second quarter of 2015, we initiated a second realignment program ("R2 Realignment Program") to better align costs and improve long-term efficiency, including further manufacturing optimization through the consolidation of facilities, a reduction in our workforce and the transfer of activities from high-cost regions to lower-cost facilities. We anticipate a total investment in this program of approximately $125 million, subject to final evaluation. We anticipate that the majority of the charges will be incurred through the remainder of 2015 and 2016.
The realignment programs consist of both restructuring and non-restructuring charges. Restructuring charges represent costs associated with the relocation or reorganization of certain business activities and facility closures and include related severance costs. Non-restructuring charges are primarily employee severance associated with workforce reductions to reduce redundancies. Expenses are primarily reported in COS or SG&A, as applicable, in our condensed consolidated statements of income.

19



Total realignment charges, net of adjustments, were $1.7 million and $(0.1) million for the three months ended September 30, 2015 and 2014, respectively. Total realignment charges, net of adjustments, were $61.2 million and $1.8 million for the nine months ended September 30, 2015 and 2014, respectively. Generally, the aforementioned charges will be paid in cash, except for asset write-downs, which are non-cash charges. The total restructuring reserve related to our realignment programs was $31.9 million and $1.1 million at September 30, 2015 and December 31, 2014, respectively.
R1 Realignment Program
The following is a summary of total charges, net of adjustments, related to the R1 Realignment Program:
 
 (Amounts in thousands)
Three Months Ended September 30, 2015
Nine Months Ended September 30, 2015
Restructuring Charges
 
 
     COS
$
57

$
18,696

     SG&A
(434
)
9,811

 
$
(377
)
$
28,507

Non-Restructuring Charges
 
 
     COS
$

$

     SG&A
459

1,159

 
$
459

$
1,159

Total Realignment Program Charges
 
 
     COS
$
57

$
18,696

   SG&A
25

10,970

 
$
82

$
29,666


The following represents the activity, primarily severance, related to the restructuring reserve for the R1 Realignment Program:
 
 
(Amounts in thousands)
Balance at December 31, 2014
 
$

Charges
 
20,883

Cash Expenditures
 

Other non-cash adjustments, including currency
 
(579
)
Balance at March 31, 2015
 
$
20,304

Charges
 
8,001

Cash Expenditures
 
(243
)
Other non-cash adjustments, including currency
 
875

Balance at June 30, 2015
 
$
28,937

Adjustments, net of charges
 
(377
)
Cash Expenditures
 
(1
)
Other non-cash adjustments, including currency
 
(419
)
Balance at September 30, 2015
 
$
28,140


20



R2 Realignment Program
The following is a summary of total charges, net of adjustments, related to the R2 Realignment Program for the three months ended September 30, 2015:
 
 
 
 
 
 
 
 
 
 
 
 
 (Amounts in thousands)
Engineered Product Division
 
Industrial Product Division
 
Flow Control Division
 
Subtotal–Reportable Segments
 
Eliminations and All Other
 
Consolidated Total
Restructuring Charges
 
 
 
 
 
 
 
 
 
 
 
     COS
$
437

 
$

 
$
1,082

 
$
1,519

 
$

 
$
1,519

     SG&A
$
909

 
$

 
$
(1,070
)
 
$
(161
)
 
$

 
$
(161
)
 
$
1,346

 
$

 
$
12

 
$
1,358

 
$

 
$
1,358

Non-Restructuring Charges
 

 
 

 
 

 
 
 
 
 
 

     COS
$
(27
)
 
$
91

 
$
59

 
$
123

 
$

 
$
123

     SG&A
$
453

 
$
(206
)
 
$
(128
)
 
$
119

 
$

 
$
119

 
$
426

 
$
(115
)
 
$
(69
)
 
$
242

 
$

 
$
242

Total Realignment Program Charges
 
 
 
 
 
 
 
 
 
 
 
     COS
$
410

 
$
91

 
$
1,141

 
$
1,642

 
$

 
$
1,642

     SG&A
$
1,362

 
$
(206
)
 
$
(1,198
)
 
$
(42
)
 
$

 
$
(42
)
 
$
1,772

 
$
(115
)
 
$
(57
)
 
$
1,600

 
$

 
$
1,600


The following is a summary of total charges, net of adjustments, related to the R2 Realignment Program for the nine months ended September 30, 2015:
 
 
 
 
 
 
 
 
 
 
 
 (Amounts in thousands)
Engineered Product Division
 
Industrial Product Division
 
Flow Control Division
 
Subtotal–Reportable Segments
 
Eliminations and All Other
 
Consolidated Total
Restructuring Charges
 
 
 
 
 
 
 
 
 
 
 
     COS
$
547

 
$

 
$
2,101

 
$
2,648

 
$

 
$
2,648

     SG&A
$
1,031

 
$

 
$
1,272

 
$
2,303

 
$

 
$
2,303

 
$
1,578

 
$

 
$
3,373

 
$
4,951

 
$

 
$
4,951

Non-Restructuring Charges
 

 
 

 
 

 
 
 
 
 
 

     COS
$
7,323

 
$
1,019

 
$
5,150

 
$
13,492

 
$

 
$
13,492

     SG&A
$
3,297

 
$
988

 
$
3,795

 
$
8,080

 
$

 
$
8,080

 
$
10,620

 
$
2,007

 
$
8,945

 
$
21,572

 
$

 
$
21,572

Total Realignment Program Charges
 
 
 
 
 
 
 
 
 
 
 
     COS
$
7,870

 
$
1,019

 
$
7,251

 
$
16,140

 
$

 
$
16,140

     SG&A
$
4,328

 
$
988

 
$
5,067

 
$
10,383

 
$

 
$
10,383

 
$
12,198

 
$
2,007

 
$
12,318

 
$
26,523

 
$

 
$
26,523


21



Restructuring charges represent costs associated with the relocation or reorganization of certain business activities and facility closures and include costs related to employee severance at closed facilities, contract termination costs, asset write-downs and other costs. Severance costs primarily include costs associated with involuntary termination benefits. Contract termination costs include costs related to termination of operating leases or other contract termination costs. Asset write-downs include accelerated depreciation of fixed assets, accelerated amortization of intangible assets and inventory write-downs. Other costs generally includes costs related to employee relocation, asset relocation, vacant facility costs (i.e., taxes and insurance) and other charges.
The following is a summary of Restructuring charges, net of adjustments, for the R2 Realignment Program the three months ended September 30, 2015:
 
 
 
 
 
 
 
 
 
 
 (Amounts in thousands)
Severance
 
Contract Termination
 
Asset Write-Downs
 
Other
 
Total
     COS
$
97

 
$
158

 
$
1,150

 
$
114

 
$
1,519

     SG&A
390

 

 
(641
)
 
90

 
(161
)
Total
$
487

 
$
158

 
$
509

 
$
204

 
$
1,358

The following is a summary of Restructuring charges, net of adjustments, for the R2 Realignment Program the nine months ended September 30, 2015:
 
 
 
 
 
 
 
 
 
 
 (Amounts in thousands)
Severance
 
Contract Termination
 
Asset Write-Downs
 
Other
 
Total
     COS
$
1,070

 
$
158

 
$
1,257

 
$
163

 
$
2,648

     SG&A
2,144

 

 
(7
)
 
166

 
2,303

Total
$
3,214

 
$
158

 
$
1,250

 
$
329

 
$
4,951


The following represents the activity, primarily severance, related to the restructuring reserve for the R2 Realignment Program:
 
 
(Amounts in thousands)
Balance at March 31, 2015
 
$

Charges
 
2,852

Cash Expenditures
 
(166
)