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EX-31.1 - EXHIBIT 31.1 - FLOWSERVE CORPfls03-31x2016exhibit311.htm
EX-32.2 - EXHIBIT 32.2 - FLOWSERVE CORPfls03-31x2016exhibit322.htm
EX-32.1 - EXHIBIT 32.1 - FLOWSERVE CORPfls03-31x2016exhibit321.htm
EX-31.2 - EXHIBIT 31.2 - FLOWSERVE CORPfls03-31x2016exhibit312.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 MARCH 31, 2016
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 April 21, 2016, there were 130,366,915 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 March 31,
 
2016
 
2015
Sales
$
947,248

 
$
1,014,620

Cost of sales
(639,247
)
 
(682,890
)
Gross profit
308,001

 
331,730

Selling, general and administrative expense
(236,910
)
 
(239,927
)
Net earnings from affiliates
3,319

 
1,573

Operating income
74,410

 
93,376

Interest expense
(14,568
)
 
(16,037
)
Interest income
676

 
758

Other expense, net
(4,543
)
 
(19,946
)
Earnings before income taxes
55,975

 
58,151

Provision for income taxes
(17,691
)
 
(28,506
)
Net earnings, including noncontrolling interests
38,284

 
29,645

Less: Net earnings attributable to noncontrolling interests
(425
)
 
(1,979
)
Net earnings attributable to Flowserve Corporation
$
37,859

 
$
27,666

Net earnings per share attributable to Flowserve Corporation common shareholders:
 
 
 
Basic
$
0.29

 
$
0.21

Diluted
0.29

 
0.20

Cash dividends declared per share
$
0.19

 
$
0.18


CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Amounts in thousands)
Three Months Ended March 31,
 
2016
 
2015
Net earnings, including noncontrolling interests
$
38,284

 
$
29,645

Other comprehensive income (loss):
 
 
 
Foreign currency translation adjustments, net of taxes of $(20,108) and $63,561, respectively
33,757

 
(106,434
)
Pension and other postretirement effects, net of taxes of $(742) and $1,692, respectively
2,786

 
7,891

Cash flow hedging activity, net of taxes of $(264) and $2,027, respectively
643

 
(5,146
)
Other comprehensive income (loss)
37,186

 
(103,689
)
Comprehensive income (loss), including noncontrolling interests
75,470

 
(74,044
)
Comprehensive loss attributable to noncontrolling interests
(1,206
)
 
(1,997
)
Comprehensive income (loss) attributable to Flowserve Corporation
$
74,264

 
$
(76,041
)

See accompanying notes to condensed consolidated financial statements.


1



FLOWSERVE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in thousands, except par value)
March 31,
 
December 31,
 
2016
 
2015
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
310,318

 
$
366,444

Accounts receivable, net of allowance for doubtful accounts of $46,914 and $43,936, respectively
914,684

 
988,391

Inventories, net
1,088,155

 
995,565

Prepaid expenses and other
116,032

 
125,410

Total current assets
2,429,189

 
2,475,810

Property, plant and equipment, net of accumulated depreciation of $892,200 and $855,214, respectively
767,633

 
758,427

Goodwill
1,240,187

 
1,223,986

Deferred taxes
82,969

 
69,327

Other intangible assets, net
228,294

 
228,777

Other assets, net
232,778

 
224,330

Total assets
$
4,981,050

 
$
4,980,657

 
 
 
 
LIABILITIES AND EQUITY
Current liabilities:
 
 
 
Accounts payable
$
410,115

 
$
491,378

Accrued liabilities
807,121

 
796,764

Debt due within one year
62,566

 
60,434

Total current liabilities
1,279,802

 
1,348,576

Long-term debt due after one year
1,573,450

 
1,560,562

Retirement obligations and other liabilities
386,812

 
387,786

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
480,369

 
494,961

Retained earnings
3,599,869

 
3,587,120

Treasury shares, at cost – 47,161 and 47,703 shares, respectively
(2,084,240
)
 
(2,106,785
)
Deferred compensation obligation
9,313

 
10,233

Accumulated other comprehensive loss
(503,637
)
 
(540,043
)
Total Flowserve Corporation shareholders’ equity
1,722,665

 
1,666,477

Noncontrolling interests
18,321

 
17,256

Total equity
1,740,986

 
1,683,733

Total liabilities and equity
$
4,981,050

 
$
4,980,657


See accompanying notes to condensed consolidated financial statements.

2



FLOWSERVE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
Three Months Ended March 31,
 
2016
 
2015
Cash flows – Operating activities:
 
 
 
Net earnings, including noncontrolling interests
$
38,284

 
$
29,645

Adjustments to reconcile net earnings to net cash used by operating activities:
 
 
 
Depreciation
24,505

 
24,600

Amortization of intangible and other assets
4,123

 
9,244

Tax deficiencies (excess tax benefits) from stock-based payment arrangements
45

 
(5,800
)
Stock-based compensation
15,957

 
9,095

Foreign currency and other non-cash adjustments
11,496

 
28,539

Change in assets and liabilities, net of acquisition:
 
 
 
Accounts receivable, net
89,649

 
59,396

Inventories, net
(69,863
)
 
(117,848
)
Prepaid expenses and other
2,904

 
(22,781
)
Other assets, net
(9,095
)
 
(2,330
)
Accounts payable
(89,487
)
 
(131,208
)
Accrued liabilities and income taxes payable
(17,374
)
 
2,698

Retirement obligations and other
844

 
14,432

       Net deferred taxes
(9,984
)
 
9,117

Net cash flows used by operating activities
(7,996
)
 
(93,201
)
Cash flows – Investing activities:
 
 
 
Capital expenditures
(20,212
)
 
(83,967
)
Payments for acquisition, net of cash acquired

 
(341,545
)
Proceeds from disposal of assets
101

 
1,649

Net cash flows used by investing activities
(20,111
)
 
(423,863
)
Cash flows – Financing activities:
 
 
 
(Tax deficiencies) excess tax benefits from stock-based payment arrangements
(45
)
 
5,800

Payments on long-term debt
(15,000
)
 
(10,000
)
Proceeds from issuance of senior notes

 
523,418

Payments of deferred loan cost

 
(1,005
)
Proceeds under other financing arrangements
14,009

 
7,190

Payments under other financing arrangements
(11,017
)
 
(5,207
)
Repurchases of common shares

 
(79,899
)
Payments of dividends
(23,415
)
 
(21,686
)
Other
(142
)
 
264

Net cash flows (used) provided by financing activities
(35,610
)
 
418,875

Effect of exchange rate changes on cash
7,591

 
(18,385
)
Net change in cash and cash equivalents
(56,126
)
 
(116,574
)
Cash and cash equivalents at beginning of period
366,444

 
450,350

Cash and cash equivalents at end of period
$
310,318

 
$
333,776


See accompanying notes to condensed consolidated financial statements.

3



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 March 31, 2016, the related condensed consolidated statements of income and comprehensive income for the three months ended March 31, 2016 and 2015, and the condensed consolidated statements of cash flows for the three months ended March 31, 2016 and 2015, 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 March 31, 2016 ("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, 2015 ("2015 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 months ended March 31, 2016 represented less than 0.5% of consolidated sales and its assets at March 31, 2016 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 March 31, 2016. 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 was approximately 7% of our gross accounts receivable at both March 31, 2016 and December 31, 2015. Given the experienced delays in collecting payments we estimate that approximately 70% 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 March 31, 2016 condensed consolidated balance sheet as compared to 64% at December 31, 2015.
At March 31, 2016 the DICOM exchange rate (formerly SIMADI) was 272.9 bolivars to the U.S. dollar, compared with the official exchange rate of 10.0 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. As of March 31, 2016, we believe the DICOM exchange rate continues to be the most appropriate rate to remeasure the U.S. dollar value of the assets, liabilities and results of operations of our Venezuelan subsidiary.
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 DICOM 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 three months ended March 31, 2016, are detailed in Note 1 to our consolidated financial statements included in our 2015 Annual Report.
Accounting Developments

4



Pronouncements Implemented
In June 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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. Our adoption of ASU No. 2014-12 effective January 1, 2016 did not have an impact on our consolidated financial condition and results of operations.
In November 2014, the FASB issued ASU No. 2014-16, "Derivatives and Hedging (Topic 815): "Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity." This ASU was issued to clarify and reinforce the practice of evaluating all relevant terms and features when reviewing the nature of a host contract. Our adoption of ASU No. 2014-16 effective January 1, 2016 did not have an impact on our consolidated financial condition and results of operations.
In January 2015, 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 accounting principles generally accepted in the U.S. (“U.S. GAAP”). Our adoption of ASU No. 2015-01 effective January 1, 2016 did not 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. Our adoption of ASU No. 2015-02 effective January 1, 2016 did not have an impact 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 ASU requires companies to present debt issuance costs in the same manner that 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. 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)." In this ASU the SEC staff 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." We adopted the provisions of ASU 2015-03 and ASU 2015-15 as of January 1, 2016. Prior period amounts have been reclassified to conform to the current period presentation. As of December 31, 2015, $10.3 million of debt issuance costs were reclassified in our consolidated balance sheet from other assets, net to long-term debt. Our adoption of ASU No. 2015-03 did not impact on our consolidated 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. Our adoption of ASU No. 2015-07 effective January 1, 2016 did not have an impact on our consolidated financial condition and results of operations.
In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes to simplify the presentation of deferred income taxes. The ASU requires that deferred tax liabilities and assets be classified as noncurrent on the balance sheet. We adopted ASU No. 2015-17 effective January 1, 2016 and as a result, prior period amounts have been reclassified to conform to the current period presentation. As of December 31, 2015, $156.0 million of deferred tax assets and $11.4 million of deferred tax liabilities were reclassified from current to noncurrent on our balance sheet. Our adoption of ASU No. 2015-17 did not have an impact on our consolidated 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,

5



including interim periods within those reporting periods. Early adoption as of the original public entity effective date is permitted. In March 2016, the FASB issued ASU No. 2016-08, "Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations". This update is simply a clarification of the implementation guidance on principle versus agent considerations. In April 2016, the FASB issued ASU No. 2016-10, “Identifying Performance Obligations and Licensing", which amends certain aspects of ASU No. 2014-09. We are currently evaluating the impact of ASU No. 2014-09 and all related ASU's 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 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 January 2016, the FASB issued ASU No. 2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities." The ASU requires entities to measure equity investments that do not result in consolidation and are not accounted for under the equity method at fair value with changes in fair value recognized in net income. The ASU also requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. The requirement to disclose the method(s) and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost on the balance sheet has been eliminated by this ASU. This ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. We are currently evaluating the impact of ASU No. 2016-01 on our consolidated financial condition and results of operations.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)”.  The ASU requires that organizations that lease assets recognize assets and liabilities on the balance sheet for the rights and obligations created by those leases.  The ASU will affect the presentation of lease related expenses on the income statement and statement of cash flows and will increase the required disclosures related to leases.  This ASU is effective for annual periods ending after December 15, 2018, and interim periods thereafter, with early adoption permitted.  We are currently evaluating the impact of ASU No. 2016-02 on our consolidated financial condition and results of operations. 
In March 2016, the FASB issued ASU No. 2016-09, "Compensation - Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting." The ASU affects the accounting for employee share-based payment transactions as it relates to accounting for income taxes, accounting for forfeitures, and statutory tax withholding requirements. This ASU is effective for annual periods ending after December 15, 2016, and interim periods within those periods with early adoption permitted. We are currently evaluating the impact of ASU No. 2016-09 on our consolidated financial condition and results of operations.

2.
Acquisition
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. SIHI, based in The Netherlands, has operations primarily in Europe and, to a lesser extent, the Americas and Asia.

6




The purchase price was allocated to the assets acquired and liabilities assumed based on estimates of fair values at the date of acquisition and is summarized below:
 
(Amounts in millions)
Accounts receivable
$
59.3

Inventories
74.0

Prepaid expenses and other
17.7

Total current assets
151.0

Intangible assets


Trademarks
20.9

Existing customer relationships
45.3

Backlog
8.5

Engineering drawings and other
3.9

Total intangible assets
78.6

Property, plant and equipment
94.5

Long-term deferred tax asset
11.7

Investments in affiliates
7.3

Total assets
343.1

Current liabilities
(88.0
)
Noncurrent liabilities
(114.7
)
Net assets
140.4

Goodwill
201.1

Purchase price, net of cash acquired of $23.4 million
$
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.
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, 3,132,024 were available for issuance as of March 31, 2016. The long-term incentive program was amended to allow Restricted Shares granted after January 1, 2016 to employees who retire and have achieved at least 55 years of age and 10 years of service to continue to vest over the original vesting period. 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 $43.6 million and $30.2 million at March 31, 2016 and December 31, 2015, respectively, which is expected to be recognized over a weighted-average period of approximately two years. 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 March 31, 2016 and 2015 was $36.4 million and $37.8 million, respectively.
We recorded stock-based compensation expense of $10.5 million ($16.0 million pre-tax) and $6.0 million ($9.1 million pre-tax) for the three months ended March 31, 2016 and 2015, respectively.

7



The following table summarizes information regarding Restricted Shares:
 
Three Months Ended March 31, 2016
 
Shares
 
Weighted Average
Grant-Date Fair
Value
Number of unvested shares:
 
 
 
Outstanding - January 1, 2016
1,540,843

 
$
58.14

Granted
856,268

 
39.26

Vested
(664,739
)
 
54.70

Canceled
(76,366
)
 
55.74

Outstanding - March 31, 2016
1,656,006

 
$
49.86


Unvested Restricted Shares outstanding as of March 31, 2016, includes approximately 878,000 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, 2014 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 1,680,000 shares based on performance targets. As of March 31, 2016, we estimate vesting of approximately 912,000 shares based on expected achievement of performance targets.
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 2015 Annual Report and Note 6 of this Quarterly Report for additional information on our derivatives. We enter into foreign exchange forward 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 March 31, 2016.
Foreign exchange contracts designated as hedging instruments had a notional value of $17.2 million and $21.0 million, at March 31, 2016 and December 31, 2015, respectively. Foreign exchange contracts with third parties not designated as hedging instruments had a notional value of $394.9 million and $376.3 million, at March 31, 2016 and December 31, 2015, respectively. At March 31, 2016, the length of foreign exchange contracts currently in place ranged from eight day to 22 months.
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 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:
 
March 31,
 
December 31,
(Amounts in thousands)
2016
 
2015
Current derivative assets
$
3,972

 
$
2,364

Noncurrent derivative assets
221

 

Current derivative liabilities
2,222

 
3,196

Noncurrent derivative liabilities
146

 
441


The fair value of foreign exchange contracts designated as hedging instruments are summarized below:
 
March 31,
 
December 31,
(Amounts in thousands)
2016
 
2015
Current derivative assets
$

 
$
26

Current derivative liabilities
524

 
1,448


8



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 March 31,
(Amounts in thousands)
2016
 
2015
Gain recognized in income
$
2,061

 
$
25,080

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 investment hedge on a prospective basis at the beginning of each quarter. We did not record any ineffectiveness for the three months ended March 31, 2016.
5.
Debt
Debt, including capital lease obligations, consisted of:
 
March 31,
 
  December 31,  
(Amounts in thousands, except percentages)
2016
 
2015(1)
1.25% EUR Senior Notes due March 17, 2022, net of unamortized discount and debt issuance costs of $7,085 and $7,034
$
561,815

 
$
535,966

4.00% USD Senior Notes due November 15, 2023, net of unamortized discount and debt issuance costs of $3,249 and $3,339
296,751

 
296,661

3.50% USD Senior Notes due September 15, 2022, net of unamortized discount and debt issuance costs of $4,298 and $4,445
495,702

 
495,555

Term Loan Facility, interest rate of 1.88% at March 31, 2016 and 1.86% at December 31, 2015, net of debt issuance costs of $1,063 and $1,181
268,937

 
283,819

Capital lease obligations and other borrowings
12,811

 
8,995

Debt and capital lease obligations
1,636,016

 
1,620,996

Less amounts due within one year
62,566

 
60,434

Total debt due after one year
$
1,573,450

 
$
1,560,562

_______________________________________
(1) Prior period information has been updated to conform to presentation requirements as prescribed by ASU No. 2015-03, "Interest - Imputation of Interest (Subtopic 835-30).

Senior Credit Facility
As discussed in Note 10 to our consolidated financial statements included in our 2015 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”) with a maturity date of October 14, 2020. As of March 31, 2016 and December 31, 2015, we had no amounts outstanding under the Revolving Credit Facility. We had outstanding letters of credit of $110.5 million and $105.2 million at March 31, 2016 and December 31, 2015, respectively, which reduced our borrowing capacity to $889.5 million and $894.8 million, respectively. Our compliance with applicable financial covenants under the Senior Credit Facility is tested quarterly, and we complied with all applicable covenants as of March 31, 2016.
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 0.150% (per annum) during the period ended March 31, 2016. During the three months ended March 31, 2016, we made scheduled repayments of $15.0 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.


9



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 March 31, 2016 was $1,337.1 million compared to the carrying value of $1,354.3 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 March 31, 2016 and December 31, 2015.
7.
Inventories
Inventories, net consisted of the following:
 
March 31,
 
  December 31,  
(Amounts in thousands)
2016
 
2015
Raw materials
$
415,403

 
$
390,998

Work in process
785,062

 
739,227

Finished goods
260,876

 
235,083

Less: Progress billings
(283,049
)
 
(285,582
)
Less: Excess and obsolete reserve
(90,137
)
 
(84,161
)
Inventories, net
$
1,088,155

 
$
995,565


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 March 31,
(Amounts in thousands, except per share data)
2016
 
2015
Net earnings of Flowserve Corporation
$
37,859

 
$
27,666

Dividends on restricted shares not expected to vest
2

 
3

Earnings attributable to common and participating shareholders
$
37,861

 
$
27,669

Weighted average shares:
 
 
 
Common stock
129,781

 
134,388

Participating securities
361

 
530

Denominator for basic earnings per common share
130,142

 
134,918

Effect of potentially dilutive securities
670

 
1,036

Denominator for diluted earnings per common share
130,812

 
135,954

Earnings per common share:
 
 
 
Basic
$
0.29

 
$
0.21

Diluted
0.29

 
0.20

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.

10



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 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 2015 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

11



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.
10.
Retirement and Postretirement Benefits
Components of the net periodic cost for retirement and postretirement benefits for the three months ended March 31, 2016 and 2015 were as follows:
 
U.S.
Defined Benefit Plans
 
Non-U.S.
Defined Benefit Plans
 
Postretirement
Medical Benefits
(Amounts in millions) 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
Service cost
$
5.9

 
$
6.2

 
$
1.8

 
$
2.2

 
$

 
$

Interest cost
4.8

 
4.3

 
2.9

 
3.3

 
0.3

 
0.3

Expected return on plan assets
(6.1
)
 
(6.1
)
 
(2.7
)
 
(3.0
)
 

 

Amortization of prior service cost
0.1

 
0.1

 

 

 

 

Amortization of unrecognized net loss (gain)
1.2

 
2.3

 
1.3

 
1.3

 
(0.1
)
 
(0.1
)
Net periodic cost recognized
$
5.9

 
$
6.8

 
$
3.3

 
$
3.8

 
$
0.2

 
$
0.2

 
11.
Shareholders’ Equity
Dividends – On February 15, 2016, our Board of Directors authorized an increase in the payment of quarterly dividends on our common stock from $0.18 per share to $0.19 per share payable beginning on April 8, 2016. 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. 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 had no repurchases of shares of our outstanding common stock during the three months ended March 31, 2016, compared to 1,382,025 shares repurchased for $79.9 million during the three months ended March 31, 2015. As of March 31, 2016 we had $160.7 million of remaining capacity under our current share repurchase program.
12.
Income Taxes
For the three months ended March 31, 2016, we earned $56.0 million before taxes and provided for income taxes of $17.7 million resulting in an effective tax rate of 31.6%. The effective tax rate varied from the U.S. federal statutory rate for the three months ended March 31, 2016 primarily due to the net impact of foreign operations.
For the three months ended March 31, 2015, we earned $58.2 million before taxes and provided for income taxes of $28.5 million, resulting in an effective tax rate of 49.0%. The effective tax rate varied from the U.S. federal statutory rate for the three months ended March 31, 2015 primarily due to tax impacts of our realignment programs and the Venezuelan exchange rate remeasurement loss in the first quarter of 2015.
As of March 31, 2016, the amount of unrecognized tax benefits increased by $1.1 million from December 31, 2015. 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 $12 million within the next 12 months.

12



13.
Segment Information
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 March 31, 2016
 
 
 
 
 
 
 
 
 
 
 (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
$
464,226

 
$
186,704

 
$
296,318

 
$
947,248

 
$

 
$
947,248

Intersegment sales
9,613

 
10,746

 
2,668

 
23,027

 
(23,027
)
 

Segment operating income
58,382

 
3,998

 
38,850

 
101,230

 
(26,820
)
 
74,410

 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 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
$
473,413

 
$
214,711

 
$
326,496

 
$
1,014,620

 
$

 
$
1,014,620

Intersegment sales
10,747

 
8,655

 
667

 
20,069

 
(20,069
)
 

Segment operating income
68,828

 
(13,338
)
 
54,715

 
110,205

 
(16,829
)
 
93,376

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 March 31, 2016 and 2015:
 
2016
 
2015
(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
$
(413,422
)
 
$
(120,461
)
 
$
(3,458
)
 
$
(537,341
)
 
$
(238,533
)
 
$
(135,398
)
 
$
(5,210
)
 
$
(379,141
)
Other comprehensive income (loss) before reclassifications
33,757

 
1,060

 
529

 
35,346

 
(106,434
)
 
5,501

 
(8,353
)
 
(109,286
)
Amounts reclassified from AOCL

 
1,726

 
114

 
1,840

 

 
2,390

 
3,207

 
5,597

Net current-period other comprehensive income (loss)
33,757

 
2,786

 
643

 
37,186

 
(106,434
)
 
7,891

 
(5,146
)
 
(103,689
)
Balance - March 31
$
(379,665
)
 
$
(117,675
)
 
$
(2,815
)
 
$
(500,155
)
 
$
(344,967
)
 
$
(127,507
)
 
$
(10,356
)
 
$
(482,830
)
_______________________________________
(1) Includes foreign currency translation adjustments attributable to noncontrolling interests of $2.7 million and $1.3 million at January 1, 2016 and 2015, $3.5 million and $1.3 million at March 31, 2016 and 2015, respectively. Includes net investment hedge losses of $12.5 million and $2.1 million, net of deferred taxes, for the three months ended March 31, 2016 and 2015, respectively. Amounts in parentheses indicate debits.


13



The following table presents the reclassifications out of AOCL:
 
 
 
Three Months Ended March 31,
(Amounts in thousands)
Affected line item in the statement of income
 
2016(1)
 
2015(1)
Cash flow hedging activity
 
 
 
 
 
Foreign exchange contracts
Other expenses, net
 
$

 
$
(3,327
)
 
Sales
 
(154
)
 
(1,182
)
 
Tax benefit
 
40

 
1,302

 
 Net of tax
 
$
(114
)
 
$
(3,207
)
 
 
 
 
 
 
Pension and other postretirement effects
 
 
 
 
 
Amortization of actuarial losses(2)
 
 
$
(2,313
)
 
$
(3,424
)
  Prior service costs(2)
 
 
(152
)
 
(156
)


Tax benefit
 
739

 
1,190



Net of tax
 
$
(1,726
)
 
$
(2,390
)
_______________________________________
(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.
 
 
At March 31, 2016, we expect to recognize a loss of $1.6 million, net of deferred taxes, into earnings in the next twelve months related to designated cash flow hedges based on their fair values at March 31, 2016.
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. 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.
The R1 Realignment Program and the R2 Realignment Program (collectively 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 cost of sales (" COS") or selling, general and administrative expense ("SG&A"), as applicable, in our condensed consolidated statements of income. We anticipate a total investment in these programs of approximately $400 million, including projects still under final evaluation. We anticipate that the majority of any remaining charges will be incurred throughout 2016 and 2017.

14



Generally, the aforementioned charges will be paid in cash, except for asset write-downs, which are non-cash charges. The following is a summary of total charges, net of adjustments, related to the Realignment Programs:
 
Three Months Ended March 31, 2016
 (Amounts in thousands)
Engineered Product Division
 
Industrial Product Division
 
Flow Control Division
 
Subtotal–Reportable Segments
 
Eliminations and All Other
 
Consolidated Total
Restructuring Charges
 
 
 
 
 
 
 
 
 
 
 
     COS
$
1,520

 
$
(184
)
 
$
108

 
$
1,444

 
$

 
$
1,444

     SG&A
2,407

 
1,712

 
159

 
4,278

 

 
4,278

     Income tax expense

 

 

 

 

 

 
$
3,927

 
$
1,528

 
$
267

 
$
5,722

 
$

 
$
5,722

Non-Restructuring Charges
 

 
 

 
 

 
 
 
 
 
 

     COS
$
99

 
$
1,793

 
$
3,860

 
$
5,752

 
$
15

 
$
5,767

     SG&A
(221
)
 
608

 
1,464

 
1,851

 
131

 
1,982

 
$
(122
)
 
$
2,401

 
$
5,324

 
$
7,603

 
$
146

 
$
7,749

Total Realignment Charges
 
 
 
 
 
 
 
 
 
 
 
     COS
$
1,619

 
$
1,609

 
$
3,968

 
$
7,196

 
$
15

 
$
7,211

     SG&A
2,186

 
2,320

 
1,623

 
6,129

 
131

 
6,260

     Income tax expense

 

 

 

 

 

 
$
3,805

 
$
3,929

 
$
5,591

 
$
13,325

 
$
146

 
$
13,471


 
Three Months Ended March 31, 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
$
9

 
$
13,159

 
$

 
$
13,168

 
$

 
$
13,168

     SG&A

 
7,484

 
(26
)
 
7,458

 

 
7,458

     Income tax expense

 
5,000

 

 
5,000

 

 
5,000

 
$
9

 
$
25,643

 
$
(26
)
 
$
25,626

 
$

 
$
25,626

Non-Restructuring Charges
 

 
 

 
 

 
 
 
 
 
 

     COS
$
6

 
$

 
$

 
$
6

 
$

 
$
6

     SG&A
632

 

 

 
632

 

 
632

 
$
638

 
$

 
$

 
$
638

 
$

 
$
638

Total Realignment Charges
 
 
 
 
 
 
 
 
 
 
 
     COS
$
15

 
$
13,159

 
$

 
$
13,174

 
$

 
$
13,174

     SG&A
632

 
7,484

 
(26
)
 
8,090

 

 
8,090

     Income tax expense

 
5,000

 

 
5,000

 

 
5,000

 
$
647

 
$
25,643

 
$
(26
)
 
$
26,264

 
$

 
$
26,264










15






The following is a summary of total inception to date charges, net of adjustments, related to the Realignment Programs:
 (Amounts in thousands)
Engineered Product Division
 
Industrial Product Division (1)
 
Flow Control Division
 
Subtotal–Reportable Segments
 
Eliminations and All Other
 
Consolidated Total
Restructuring Charges
 
 
 
 
 
 
 
 
 
 
 
     COS
$
11,483

 
$
20,262

 
$
9,409

 
$
41,154

 
$

 
$
41,154

     SG&A
9,882

 
10,971

 
7,770

 
28,623

 

 
28,623

     Income tax expense

 
8,900

 

 
8,900

 

 
8,900

 
$
21,365

 
$
40,133

 
$
17,179

 
$
78,677

 
$

 
$
78,677

Non-Restructuring Charges
 

 
 

 
 

 
 
 
 
 
 

     COS
$
10,365

 
$
9,954

 
$
12,443

 
$
32,762

 
$
15

 
$
32,777

     SG&A
6,310

 
6,756

 
4,877

 
17,943

 
131

 
18,074

 
$
16,675

 
$
16,710

 
$
17,320

 
$
50,705

 
$
146

 
$
50,851

Total Realignment Charges
 
 
 
 
 
 
 
 
 
 
 
     COS
$
21,848

 
$
30,216

 
$
21,852

 
$
73,916

 
$
15

 
$
73,931

     SG&A
16,192

 
17,727

 
12,647

 
46,566

 
131

 
46,697

     Income tax expense

 
8,900

 

 
8,900

 

 
8,900

 
$
38,040

 
$
56,843

 
$
34,499

 
$
129,382

 
$
146

 
$
129,528

_______________________________
(1) Includes $36.7 million of restructuring charges, primarily COS, related to the R1 Realignment Program.
 
 
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 include 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 Realignment Programs:
 
Three Months Ended March 31, 2016
 (Amounts in thousands)
Severance
 
Contract Termination
 
Asset Write-Downs
 
Other
 
Total
     COS
$
63

 
$

 
$
918

 
$
463

 
$
1,444

     SG&A
3,754

 

 
36

 
488

 
4,278

     Income tax expense

 

 

 

 

Total
$
3,817

 
$

 
$
954

 
$
951

 
$
5,722

 
Three Months Ended March 31, 2015
 (Amounts in thousands)
Severance
 
Contract Termination
 
Asset Write-Downs
 
Other
 
Total
     COS
$
13,168

 
$

 
$

 
$

 
$
13,168

     SG&A
7,458

 

 

 

 
7,458

     Income tax expense

 

 

 
5,000

 
5,000

Total
$
20,626

 
$

 
$

 
$
5,000

 
$
25,626

    


16






The following is a summary of total inception to date restructuring charges, net of adjustments, related to the Realignment Programs:
 (Amounts in thousands)
Severance
 
Contract Termination
 
Asset Write-Downs
 
Other
 
Total (1)
     COS(1)
$
37,402

 
$
424

 
$
2,682

 
$
646

 
$
41,154

     SG&A
27,341

 
43

 
69

 
1,170

 
28,623

     Income tax expense

 

 

 
8,900

 
8,900

Total
$
64,743

 
$
467

 
$
2,751

 
$
10,716

 
$
78,677

_______________________________
(1) Includes $36.7 million of restructuring charges, primarily COS, related to the R1 Realignment Program.

 
The following represents the activity, primarily severance, related to the restructuring reserve for the Realignment Programs:
(Amounts in thousands)
R1 Realignment Program
 
R2 Realignment Program
 
Total
Balance at December 31, 2015
$
25,156

 
$
33,147

 
$
58,303

Charges
976

 
3,792

 
4,768

Cash expenditures
(1,294
)
 
(3,999
)
 
(5,293
)
Other non-cash adjustments, including currency
(877
)
 
(1,162
)
 
(2,039
)
Balance at March 31, 2016
$
23,961

 
$
31,778

 
$
55,739


Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements, and notes thereto, and the other financial data included elsewhere in this Quarterly Report. The following discussion should also be read in conjunction with our audited consolidated financial statements, and notes thereto, and "Management’s Discussion and Analysis of Financial Condition and Results of Operations" ("MD&A") included in our 2015 Annual Report.
EXECUTIVE OVERVIEW
Our Company
We believe that we are a world-leading manufacturer and aftermarket service provider of comprehensive flow control systems. We develop and manufacture precision-engineered flow control equipment integral to the movement, control and protection of the flow of materials in our customers’ critical processes. Our product portfolio of pumps, valves, seals, automation and aftermarket services supports global infrastructure industries, including oil and gas, chemical, power generation and water management, as well as general industrial markets where our products and services add value. Through our manufacturing platform and global network of Quick Response Centers ("QRCs"), we offer a broad array of aftermarket equipment services, such as installation, advanced diagnostics, repair and retrofitting. We currently employ approximately 19,000 employees in more than 50 countries.
Our business model is significantly influenced by the capital spending of global infrastructure industries for the placement of new products into service and aftermarket services for existing operations. The worldwide installed base of our products is an important source of aftermarket revenue, where products are expected to ensure the maximum operating time of many key industrial processes. Over the past several years, we have significantly invested in our aftermarket strategy to provide local support to drive customer investments in our offerings and use of our services to replace or repair installed products. The aftermarket portion of our business also helps provide business stability during various economic periods. The aftermarket business, which is served by our network of 189 QRCs located around the globe, provides a variety of service offerings for our customers including spare parts,

17



service solutions, product life cycle solutions and other value-added services. It is generally a higher margin business compared to our original equipment business and a key component of our profitable growth strategy.
Our operations are conducted through three business segments that are referenced throughout this MD&A:
EPD for long lead-time, custom and other highly-engineered pumps and pump systems, mechanical seals, auxiliary systems and replacement parts and related services;
IPD for engineered and pre-configured industrial pumps and pump systems and related products and services; and
FCD for engineered and industrial valves, control valves, actuators and controls and related services.
Our business segments share a focus on industrial flow control technology and have a high number of common customers. These segments also have complementary product offerings and technologies that are often combined in applications that provide us a net competitive advantage. Our segments also benefit from our global footprint and our economies of scale in reducing administrative and overhead costs to serve customers more cost effectively. For example, our segment leadership reports to our Chief Operating Officer ("COO") and the segments share leadership for operational support functions, such as research and development, marketing and supply chain.
The reputation of our product portfolio is built on more than 50 well-respected brand names such as Worthington, IDP, Valtek, Limitorque, Durco, Edward, Anchor/Darling, SIHI, Halberg and Durametallic, which we believe to be one of the most comprehensive in the industry. Our products and services are sold either directly or through designated channels to more than 10,000 companies, including some of the world’s leading engineering, procurement and construction ("EPC") firms, original equipment manufacturers, distributors and end users.
We continue to build on our geographic breadth through our QRC network with the goal to be positioned as near to customers as possible for service and support in order to capture valuable aftermarket business. Along with ensuring that we have the local capability to sell, install and service our equipment in remote regions, it is equally imperative to continuously improve our global operations. We continue to expand our global supply chain capability to meet global customer demands and ensure the quality and timely delivery of our products. Additionally, we continue to devote resources to improving the supply chain processes across our business segments to find areas of synergy and cost reduction and to improve our supply chain management capability to ensure it can meet global customer demands. We also remain focused on improving on-time delivery and quality, while managing warranty costs as a percentage of sales across our global operations, through the assistance of a focused Continuous Improvement Process ("CIP") initiative. The goal of the CIP initiative, which include lean manufacturing, six sigma business management strategy and value engineering, is to maximize service fulfillment to customers through on-time delivery, reduced cycle time and quality at the highest internal productivity.
During 2015 and thus far in 2016, we were challenged by broad-based capital spending declines, originating in the oil and gas industry, heightened pricing pressures and negative currency impacts caused by a stronger U.S. dollar. This was further compounded by economic and geo-political conditions in Latin America, the Middle East and China. In addition, we experienced lower than expected activity levels in our aftermarket business due to deferred spending of our customers' repair and maintenance budgets. We expect that the current environment will persist throughout 2016.
To better align costs and improve long-term efficiency, we initiated Realignment Programs to accelerate both short- and long-term strategic plans, including targeted manufacturing optimization through the consolidation of facilities, SG&A efficiency initiatives and transfer of activities from high-cost regions to lower-cost facilities. At the completion of the programs, we expect a 15% to 20% reduction in our global workforce, relative to early 2015 workforce levels. With an expected near-term investment of approximately $400 million, including projects still under final evaluation, we expect the results of our realignment programs will deliver annualized run-rate savings of approximately $230 million. In addition, we are focusing on our ongoing low-cost sourcing, including greater use of third-party suppliers and increasing our lower-cost, emerging market capabilities.
RESULTS OF OPERATIONS — Three months ended March 31, 2016 and 2015
Throughout this discussion of our results of operations, we discuss the impact of fluctuations in foreign currency exchange rates. We have calculated currency effects on operations by translating current year results on a monthly basis at prior year exchange rates for the same periods.
In the first quarter of 2015, we initiated a realignment program to reduce and optimize certain non-strategic QRCs and manufacturing facilities from the SIHI acquisition. In the second quarter of 2015, we initiated a 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.

18



The total charges for Realignment Programs by segment are detailed below:
 
Three Months Ended March 31, 2016
 (Amounts in thousands)
Engineered Product Division
 
Industrial Product Division
 
Flow Control Division
 
Subtotal–Reportable Segments
 
Eliminations and All Other
 
Consolidated Total
Total Realignment Program Charges
 
 
 
 
 
 
 
 
 
 
 
     COS
$
1,619

 
$
1,609

 
$
3,968

 
$
7,196

 
$
15

 
$
7,211

     SG&A
2,186

 
2,320

 
1,623

 
6,129

 
131

 
6,260

     Income tax expense

 

 

 

 

 

 
$
3,805

 
$
3,929

 
$
5,591

 
$
13,325

 
$
146

 
$
13,471

 
Three Months Ended March 31, 2015
 (Amounts in thousands)
Engineered Product Division
 
Industrial Product Division
 
Flow Control Division
 
Subtotal–Reportable Segments
 
Eliminations and All Other
 
Consolidated Total
Total Realignment Program Charges
 
 
 
 
 
 
 
 
 
 
 
     COS
$
15

 
$
13,159

 
$

 
$
13,174

 
$

 
$
13,174

     SG&A
632

 
7,484

 
(26
)
 
8,090

 

 
8,090

     Income tax expense

 
5,000

 

 
5,000

 

 
5,000

 
$
647

 
$
25,643

 
$
(26
)
 
$
26,264

 
$

 
$
26,264

 
 
We anticipate a total investment in these Realignment Programs of approximately $400 million, including projects still under final evaluation. Since inception of the Realignment Programs in 2015, we have incurred charges of $129.5 million and we expect to incur the majority of the remaining charges throughout 2016 and 2017.
Based on actions under our Realignment Programs, we estimate that we have achieved cost savings of approximately $16 million for the three months ended March 31, 2016 of which approximately half was in COS with the remainder in SG&A. Upon completion of the Realignment Programs, we expect annual run-rate cost savings of approximately $230 million, with a portion achieved in 2016 and a larger portion achieved in 2017. Actual savings could vary from expected savings, which represent management’s best estimate to date.

Consolidated Results
Bookings, Sales and Backlog
 
 
Three Months Ended March 31,
(Amounts in millions)
2016
 
2015
Bookings
$
921.8

 
$
1,042.6

Sales
947.2

 
1,014.6


We define a booking as the receipt of a customer order that contractually engages us to perform activities on behalf of our customer with regard to manufacturing, service or support. Bookings recorded and subsequently canceled within the year-to-date period are excluded from year-to-date bookings. Bookings for the three months ended March 31, 2016 decreased by $120.8 million, or 11.6%, as compared with the same period in 2015. The decrease included negative currency effects of approximately $40 million. The decrease was primarily driven by the oil and gas industry, and to a lesser extent, the general and chemical industries, partially offset by an increase in the power generation industry. The decrease was more heavily weighted toward customer original equipment bookings.

Sales for the three months ended March 31, 2016 decreased by $67.4 million, or 6.6%, as compared with the same period in 2015. The decrease included negative currency effects of approximately $47 million. The decrease was more heavily weighted towards original equipment sales with decreased sales into every region except the Middle East. Net sales to international customers,

19



including export sales from the U.S., were approximately 62% and 64% of total sales for the three months ended March 31, 2016 and 2015, respectively.
Backlog represents the aggregate value of booked but uncompleted customer orders and is influenced primarily by bookings, sales, cancellations and currency effects. Backlog of $2,190.9 million at March 31, 2016 increased by $17.7 million, or 0.8%, as compared with December 31, 2015. Currency effects provided an increase of approximately $54 million. Approximately 27% of the backlog at March 31, 2016 was related to aftermarket orders.
Gross Profit and Gross Profit Margin
 
 
Three Months Ended March 31,
(Amounts in millions, except percentages)
2016
 
2015
Gross profit
$
308.0

 
$
331.7

Gross profit margin
32.5
%
 
32.7
%

Gross profit for the three months ended March 31, 2016 decreased by $23.7 million, or 7.1%, as compared with the same period in 2015. Gross profit margin for the three months ended March 31, 2016 of 32.5% decreased from 32.7% for the same period in 2015. The decrease in gross profit margin was primarily attributed to the negative impact of decreased sales on our absorption of fixed manufacturing costs and lower margin projects that shipped from backlog, partially offset by savings achieved and a decrease in charges related to our Realignment Programs and the negative impact of margins on acquired SIHI backlog and inventory ("Purchase Price Adjustments") in 2015 that did not recur.

Selling, General and Administrative Expense
 
 
Three Months Ended March 31,
(Amounts in millions, except percentages)
2016
 
2015
SG&A
$
236.9

 
$
239.9

SG&A as a percentage of sales
25.0
%
 
23.6
%

SG&A for the three months ended March 31, 2016 decreased by $3.0 million, or 1.3%, as compared with the same period in 2015. Currency effects yielded a decrease of approximately $8 million. SG&A as a percentage of sales for the three months ended March 31, 2016 increased 140 basis points as compared with the same period in 2015 due primarily to lower sales leverage and increased broad-based annual and long-term incentive program compensation, partially offset by savings achieved and a decrease in charges related to our Realignment Programs and lower SIHI acquisition costs.

Net Earnings from Affiliates
 
 
Three Months Ended March 31,
(Amounts in millions)
2016
 
2015
Net earnings from affiliates
$
3.3

 
$
1.6


Net earnings from affiliates for the three months ended March 31, 2016 increased $1.7 million, or 106.3%, as compared with the same period in 2015. The increase was primarily a result of increased earnings of our EPD joint venture in South Korea.

Operating Income and Operating Margin
 
 
Three Months Ended March 31,
(Amounts in millions, except percentages)
2016
 
2015
Operating income
$
74.4

 
$
93.4

Operating income as a percentage of sales
7.9
%
 
9.2
%

Operating income for the three months ended March 31, 2016 decreased by $19.0 million, or 20.3%, as compared with the same period in 2015. The decrease included negative currency effects of approximately $5 million. The decrease was primarily a result of the $23.7 million decrease in gross profit, partially offset by a $3.0 million decrease in SG&A.

20




Interest Expense and Interest Income
 
 
Three Months Ended March 31,
(Amounts in millions)
2016
 
2015
Interest expense
$
(14.6
)
 
$
(16.0
)
Interest income
0.7

 
0.8


Interest expense for the three months ended March 31, 2016 decreased $1.4 million, as compared with the same period in 2015. The $1.4 million decrease was primarily attributable to lower interest expense associated with decreased borrowings under our Revolving Credit Facility in the first quarter of 2016, as compared to the same period in 2015.

Other Expense, Net
 
 
Three Months Ended March 31,
(Amounts in millions)
2016
 
2015
Other expense, net
$
(4.5
)
 
$
(19.9
)

Other expense, net for the three months ended March 31, 2016 decreased $15.4 million as compared with the same period in 2015, due primarily to a $38.6 million decrease in losses from transactions in currencies other than our sites' functional currencies, partially offset by a $23.1 million decrease in gains arising from transactions on foreign exchange contracts. The net change was primarily due to the foreign currency exchange rate movements in the Brazilian real, Euro and Canadian dollar in relation to the U.S. dollar during the three months ended March 31, 2016, as compared with the same period in 2015, and the $18.5 million loss as a result of the remeasurement of our Venezuelan bolivar-denominated net monetary assets in the first quarter of 2015 that did not recur.

Tax Expense and Tax Rate
 
 
Three Months Ended March 31,
(Amounts in millions, except percentages)
2016
 
2015
Provision for income taxes
$
17.7

 
$
28.5

Effective tax rate
31.6
%
 
49.0
%

Our effective tax rate of 31.6% for the three months ended March 31, 2016 decreased from 49.0% for the same period in 2015. The decrease was primarily due to tax impacts of our Realignment Programs and the Venezuelan exchange rate remeasurement loss in the first quarter of 2015 that did not recur. The effective tax rate varied from the U.S. federal statutory rate for the three months ended March 31, 2016 primarily due to the net impact of foreign operations.

Other Comprehensive Income (Loss)
 
 
Three Months Ended March 31,
(Amounts in millions)
2016
 
2015
Other comprehensive income (loss)
$
37.2

 
$
(103.7
)

Other comprehensive income for the three months ended March 31, 2016 increased $140.9 million to income of $37.2 million as compared to a loss of $103.7 million in 2015. The increase was primarily due to the foreign currency exchange rate movements of the Euro and Brazilian real versus the U.S. dollar during the three months ended March 31, 2016, as compared with the same period in 2015.


21



Business Segments
We conduct our operations through three business segments based on type of product and how we manage the business. We evaluate segment performance and allocate resources based on each segment’s operating income. The key operating results for our three business segments, EPD, IPD and FCD, are discussed below.
Engineered Product Division Segment Results
 
Our largest business segment is EPD, through which we design, manufacture, distribute and service custom and other highly-engineered pumps and pump systems, mechanical seals, auxiliary systems and spare parts (collectively referred to as "original equipment"). EPD includes longer lead-time, highly-engineered pump products and shorter cycle engineered pumps and mechanical seals that are generally manufactured more quickly. EPD also manufactures replacement parts and related equipment and provides a full array of replacement parts, repair and support services (collectively referred to as "aftermarket"). EPD primarily operates in the oil and gas, power generation, chemical, water management and general industries. EPD operates in 47 countries with 33 manufacturing facilities worldwide, 10 of which are located in Europe, 11 in North America, seven in Asia and five in Latin America, and it has 128 QRCs, including those co-located in manufacturing facilities and/or shared with FCD.
 
Three Months Ended March 31,
(Amounts in millions, except percentages)
2016
 
2015
Bookings
$
424.5

 
$
495.4

Sales
473.8

 
484.2

Gross profit
158.0

 
165.6

Gross profit margin
33.3
%
 
34.2
%
Segment operating income
58.4

 
68.8

Segment operating income as a percentage of sales
12.3
%
 
14.2
%
Bookings for the three months ended March 31, 2016 decreased by $70.9 million, or 14.3%, as compared with the same period in 2015. The decrease included negative currency effects of approximately $23 million. The decrease in customer bookings was primarily driven by the oil and gas, chemical and general industries. Bookings decreased $31.0 million into Europe, $20.6 million into Latin America, $9.8 million into the Middle East, $9.5 million into North America and $6.3 million into Africa, partially offset by an increase of $10.9 million into Asia Pacific. The decrease was more heavily weighted towards customer original equipment bookings. Interdivision bookings (which are eliminated and are not included in consolidated bookings as disclosed above) decreased $3.0 million.
Sales for the three months ended March 31, 2016 decreased $10.4 million, or 2.1%, as compared with the same period in 2015. The decrease included negative currency effects of approximately $33 million. The decrease was driven by aftermarket sales, resulting from decreased sales of $21.4 million into Latin America and $9.0 million into Europe, partially offset by increased sales of $14.5 million into the Middle East and $5.4 million into Asia Pacific. Interdivision sales (which are eliminated and are not included in consolidated sales as disclosed above) decreased $1.1 million.
Gross profit for the three months ended March 31, 2016 decreased by $7.6 million, or 4.6%, as compared with the same period in 2015. Gross profit margin for the three months ended March 31, 2016 of 33.3% decreased from 34.2% for the same period in 2015. The decrease in gross profit margin was primarily attributable to increased charges related to our Realignment Programs, the negative impact of a mix shift to original equipment sales compared to the same period in 2015 and the negative impact of decreased sales on our absorption of fixed manufacturing costs.
Operating income for the three months ended March 31, 2016 decreased by $10.4 million, or 15.1%, as compared with the same period in 2015. The decrease included negative currency effects of approximately $5 million. The decrease was due to a $7.6 million decrease in gross profit and a $4.4 million increase in SG&A (including a decrease due to currency effects of approximately $5 million). The increase in SG&A is primarily due to increased charges related to our Realignment Programs.
Backlog of $1,132.6 million at March 31, 2016 decreased by $24.7 million, or 2.1%, as compared with December 31, 2015. Currency effects provided an increase of approximately $29 million. Backlog at March 31, 2016 and December 31, 2015 included $9.3 million and $10.5 million, respectively, of interdivision backlog (which is eliminated and not included in consolidated backlog as disclosed above).
Industrial Product Division Segment Results
 
Through IPD, we design, manufacture, distribute and service engineered, pre-configured industrial pumps and pump systems, including submersible motors (collectively referred to as "original equipment"). Additionally, IPD manufactures replacement parts and related equipment, and provides a full array of support services (collectively referred to as "aftermarket"). IPD primarily

22



operates in the oil and gas, chemical, water management, power generation and general industries. IPD operates 21 manufacturing facilities, five of which are located in the U.S, 11 in Europe, four in Asia, one in Latin America and it operates 33 QRCs worldwide, including 20 sites in Europe, six in the U.S., three in Latin America and four in Asia, including those co-located in manufacturing facilities.
 
Three Months Ended March 31,
(Amounts in millions, except percentages)
2016
 
2015
Bookings
$
207.7

 
$
247.7

Sales
197.5

 
223.4

Gross profit
50.2

 
42.9

Gross profit margin
25.4
%
 
19.2
 %
Segment operating income (loss)
4.0

 
(13.3
)
Segment operating income as a percentage of sales
2.0
%
 
(6.0
)%
Bookings for the three months ended March 31, 2016 decreased by $40.0 million, or 16.1%, as compared with the same period in 2015. The decrease included negative currency effects of approximately $6 million. The decrease in customer bookings was primarily driven by the oil and gas and chemical industries. Bookings decreased $16.4 million into the Middle East, $9.7 million into North America and $8.5 million into Europe. The decrease was driven by customer original equipment bookings. Interdivision bookings (which are eliminated and are not included in consolidated bookings as disclosed above) were consistent with the same period in 2015.
Sales for the three months ended March 31, 2016 decreased $25.9 million, or 11.6%, as compared with the same period in 2015. The decrease included negative currency effects of approximately $6 million and was primarily driven by customer original equipment sales. Customer sales decreased $15.4 million into Europe and $14.4 million into Asia Pacific, partially offset by increased sales of $4.7 million into North America. Interdivision sales (which are eliminated and are not included in consolidated sales as disclosed above) increased $2.1 million when compared to the same period in 2015.
Gross profit for the three months ended March 31, 2016 increased by $7.3 million, or 17.0%, as compared with the same period in 2015. Gross profit margin for the three months ended March 31, 2016 of 25.4% increased from 19.2% for the same period in 2015. The increase was primarily attributable to a decrease in charges related to our Realignment Programs compared to 2015 and the negative impact of Purchase Price Adjustments in 2015 that did not recur, partially offset by the negative impact of decreased sales on our absorption of fixed manufacturing costs.
Operating income for the three months ended March 31, 2016 increased by $17.3 million, as compared with the same period in 2015. The increase included currency benefits of less than one million. The increase was primarily due to the $7.3 million increase in gross profit and a $9.7 million decrease in SG&A related primarily to decreased charges associated with our Realignment Programs and lower SIHI acquisition costs.
Backlog of $441.6 million at March 31, 2016 increased by $17.0 million, or 4.0%, as compared with December 31, 2015. Currency effects provided an increase of approximately $12 million. Backlog at March 31, 2016 and December 31, 2015 included $13.0 million and $15.7 million, respectively, of interdivision backlog (which is eliminated and not included in consolidated backlog as disclosed above).
Flow Control Division Segment Results
 
Our second largest business segment is FCD, which designs, manufactures and distributes a broad portfolio of engineered-to-order and configured-to-order isolation valves, control valves, valve automation products, boiler controls and related services. FCD leverages its experience and application know-how by offering a complete menu of engineered services to complement its expansive product portfolio. FCD has a total of 58 manufacturing facilities and QRCs in 25 countries around the world, with five of its 26 manufacturing operations located in the U.S., 13 located in Europe, seven located in Asia Pacific and one located in Latin America. Based on independent industry sources, we believe that FCD is the fourth largest industrial valve supplier on a global basis.

23



 
Three Months Ended March 31,
(Amounts in millions, except percentages)
2016
 
2015
Bookings
$
310.1

 
$
323.0

Sales
299.0

 
327.2

Gross profit
99.0

 
118.9

Gross profit margin
33.1
%
 
36.3
%