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EX-32.2 - EXHIBIT 32.2 - FLOWSERVE CORPa03-31x2017exhibit322.htm
EX-32.1 - EXHIBIT 32.1 - FLOWSERVE CORPa03-31x2017exhibit321.htm
EX-31.2 - EXHIBIT 31.2 - FLOWSERVE CORPa03-31x2017exhibit312.htm
EX-31.1 - EXHIBIT 31.1 - FLOWSERVE CORPa03-31x2017exhibit311.htm
EX-10.1 - EXHIBIT 10.1 - FLOWSERVE CORPa3-31x2017exhibit101.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, 2017
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 ¨
Emerging growth company ¨
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
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 25, 2017, there were 130,618,272 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,
 
2017
 
2016
Sales
$
863,626

 
$
947,248

Cost of sales
(599,746
)
 
(639,247
)
Gross profit
263,880

 
308,001

Selling, general and administrative expense
(222,029
)
 
(236,910
)
Net earnings from affiliates
5,165

 
3,319

Operating income
47,016

 
74,410

Interest expense
(14,696
)
 
(14,568
)
Interest income
624

 
676

Other expense, net
(11,127
)
 
(4,543
)
Earnings before income taxes
21,817

 
55,975

Provision for income taxes
(6,755
)
 
(17,691
)
Net earnings, including noncontrolling interests
15,062

 
38,284

Less: Net earnings attributable to noncontrolling interests
(239
)
 
(425
)
Net earnings attributable to Flowserve Corporation
$
14,823

 
$
37,859

Net earnings per share attributable to Flowserve Corporation common shareholders:
 
 
 
Basic
$
0.11

 
$
0.29

Diluted
0.11

 
0.29

Cash dividends declared per share
$
0.19

 
$
0.19


CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Amounts in thousands)
Three Months Ended March 31,
 
2017
 
2016
Net earnings, including noncontrolling interests
$
15,062

 
$
38,284

Other comprehensive income:
 
 
 
Foreign currency translation adjustments, net of taxes of $(21,490) and $(20,108) respectively
36,171

 
33,757

Pension and other postretirement effects, net of taxes of $(356) and $(742), respectively
484

 
2,786

Cash flow hedging activity, net of taxes of $(34) and $(264), respectively
103

 
643

Other comprehensive income
36,758

 
37,186

Comprehensive income, including noncontrolling interests
51,820

 
75,470

Comprehensive income attributable to noncontrolling interests
(772
)
 
(1,206
)
Comprehensive income attributable to Flowserve Corporation
$
51,048

 
$
74,264


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,
 
2017
 
2016
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
325,783

 
$
367,162

Accounts receivable, net of allowance for doubtful accounts of $52,072 and $51,920, respectively
844,597

 
894,749

Inventories, net
957,120

 
919,251

Prepaid expenses and other
154,633

 
150,199

Total current assets
2,282,133

 
2,331,361

Property, plant and equipment, net of accumulated depreciation of $911,160 and $882,151, respectively
715,563

 
723,628

Goodwill
1,211,153

 
1,205,054

Deferred taxes
84,590

 
87,178

Other intangible assets, net
216,724

 
214,527

Other assets, net
186,668

 
181,014

Total assets
$
4,696,831

 
$
4,742,762

 
 
 
 
LIABILITIES AND EQUITY
Current liabilities:
 
 
 
Accounts payable
$
354,566

 
$
412,087

Accrued liabilities
654,025

 
680,689

Debt due within one year
90,632

 
85,365

Total current liabilities
1,099,223

 
1,178,141

Long-term debt due after one year
1,477,549

 
1,485,258

Retirement obligations and other liabilities
418,196

 
410,168

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
481,443

 
491,848

Retained earnings
3,624,907

 
3,632,163

Treasury shares, at cost – 46,575 and 46,980 shares, respectively
(2,063,085
)
 
(2,078,527
)
Deferred compensation obligation
6,641

 
8,507

Accumulated other comprehensive loss
(590,523
)
 
(626,748
)
Total Flowserve Corporation shareholders’ equity
1,680,374

 
1,648,234

Noncontrolling interests
21,489

 
20,961

Total equity
1,701,863

 
1,669,195

Total liabilities and equity
$
4,696,831

 
$
4,742,762


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,
 
2017
 
2016
Cash flows – Operating activities:
 
 
 
Net earnings, including noncontrolling interests
$
15,062

 
$
38,284

Adjustments to reconcile net earnings to net cash provided (used) by operating activities:
 
 
 
Depreciation
24,586

 
24,505

Amortization of intangible and other assets
4,039

 
4,123

Stock-based compensation
11,307

 
15,957

Foreign currency and other non-cash adjustments
594

 
11,496

Change in assets and liabilities, net of acquisition:
 
 
 
Accounts receivable, net
66,343

 
89,649

Inventories, net
(22,669
)
 
(69,863
)
Prepaid expenses and other
(2,436
)
 
2,904

Other assets, net
(5,074
)
 
(9,095
)
Accounts payable
(61,918
)
 
(89,487
)
Accrued liabilities and income taxes payable
(35,375
)
 
(15,041
)
Retirement obligations and other
2,253

 
844

       Net deferred taxes
7,215

 
(9,984
)
Net cash flows provided (used) by operating activities
3,927

 
(5,708
)
Cash flows – Investing activities:
 
 
 
Capital expenditures
(15,862
)
 
(20,212
)
Proceeds from disposal of assets and other
367

 
101

Net cash flows used by investing activities
(15,495
)
 
(20,111
)
Cash flows – Financing activities:
 
 
 
Payments on long-term debt
(15,000
)
 
(15,000
)
Proceeds under other financing arrangements
5,715

 
14,009

Payments under other financing arrangements
(1,314
)
 
(11,017
)
Payments related to tax withholding for stock-based compensation
(3,198
)
 
(2,333
)
Payments of dividends
(24,785
)
 
(23,415
)
Other
(244
)
 
(142
)
Net cash flows used by financing activities
(38,826
)
 
(37,898
)
Effect of exchange rate changes on cash
9,015

 
7,591

Net change in cash and cash equivalents
(41,379
)
 
(56,126
)
Cash and cash equivalents at beginning of period
367,162

 
366,444

Cash and cash equivalents at end of period
$
325,783

 
$
310,318


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, 2017, the related condensed consolidated statements of income and comprehensive income for the three months ended March 31, 2017 and 2016, and the condensed consolidated statements of cash flows for the three months ended March 31, 2017 and 2016, 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, 2017 ("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, 2016 ("2016 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, 2017 represented less than 0.5% of consolidated sales and its assets at March 31, 2017 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, 2017. 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. In the third quarter of 2016 we recorded a charge of $63.2 million to selling, general and administrative expense ("SG&A") to fully reserve for those potentially uncollectible accounts receivable and a charge to cost of sales ("COS") of $1.9 million to reserve for related net inventory exposures. We continue to pursue payments from our Venezuelan customer.
At March 31, 2017 the DICOM exchange rate was 709.7 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, 2017, 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.
Valuation of Goodwill, Indefinite-Lived Intangible Assets and Other Long-Lived Assets – As discussed in Note 1 to our consolidated financial statements included in our 2016 Annual Report, the value of our goodwill and indefinite-lived intangible
assets is tested for impairment as of December 31 each year or whenever events or circumstances indicate such assets may be impaired.
We did not record an impairment of goodwill in 2016, 2015 or 2014; however at December 31, 2016 the estimated fair value of our Engineered Product Operations ("EPO") and Industrial Product Division ("IPD") reporting units reduced significantly due to broad-based capital spending declines and heightened pricing pressure experienced in the oil and gas markets which are anticipated to continue in the near to mid-term. Although we concluded that there is no impairment on the goodwill associated with our EPO and IPD reporting units as of December 31, 2016, we will continue to closely monitor their performance and related market conditions for future indicators of potential impairment and reassess accordingly.
Accounting Policies
Significant accounting policies, for which no significant changes have occurred in the three months ended March 31, 2017, are detailed in Note 1 to our consolidated financial statements included in our 2016 Annual Report.
Accounting Developments
Pronouncements Implemented
In July 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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 updates 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. Our adoption of ASU No. 2015-11 effective January 1, 2017 did not have an impact 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

4



as it relates to accounting for income taxes, accounting for forfeitures, and statutory tax withholding requirements. We adopted the provisions of ASU 2016-09 as of January 1, 2017. The adoption resulted in the recognition of approximately $1 million of tax expense in our provision of income taxes and an approximately $3 million one-time, cumulative adjustment to beginning retained earnings related to the change in our accounting policy for estimated forfeitures and share cancellations. In addition, in our statements of cash flows we reclassified cash outflows for employee taxes paid from operating to financing and cash impacts due to excess tax deficiencies and benefits from financing to operating, which resulted in a net reclassification of approximately $2 million of cash flows used from operating to financing for the three months ended March 31, 2016.
Pronouncements Not Yet Implemented
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)" which supersedes most of 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. Companies are permitted to adopt the new standard using one of two transition methods. Under the full retrospective method, the requirements of the new standard are applied to contracts for each prior reporting period presented and the cumulative effect of applying the standard is recognized in the earliest period presented. Under the modified retrospective method the requirements of the new standard are applied to contracts that are open as of January 1, 2018, the required date of adoption and the cumulative effect of applying the standard is recognized as an adjustment to beginning retained earnings in that same year. The standard also includes significantly expanded disclosure requirements for revenue. Since 2014, the FASB has issued several updates to Topic 606.
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. We plan to adopt the new revenue guidance effective January 1, 2018 using the modified retrospective method for transition. In 2015, we established a cross-functional implementation team consisting of representatives from across all of our reportable segments to begin the process of analyzing the impact of the standard on our contracts. The preliminary results of our evaluation, which is still in process, indicate that one of the changes upon adoption may be potentially increased “over-time” revenue recognition. Historically, revenue recognized under the percentage of completion method is less than 7% of our consolidated sales. We also anticipate changes to the consolidated balance sheet related to accounts receivable, contract assets and contract liabilities. Additionally, we are in the process of evaluating and designing the necessary changes to our business processes, systems and controls to support recognition and disclosure under the new standard. We are continuing our evaluation to determine the 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 beginning after December 15, 2018, including interim periods within those fiscal years with early adoption permitted.  We are currently evaluating the impact of ASU No. 2016-02 on our consolidated financial condition and results of operations.  Although we are continuing to evaluate, upon initial qualitative evaluation, we believe a key change upon adoption will be the balance sheet recognition of leased assets and liabilities. Based on our qualitative evaluation to date, we believe that any changes in income statement recognition will not be material.
In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments." The amendments in this ASU replace the current incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. We are currently evaluating the impact of ASU No. 2016-13 on our consolidated financial condition and results of operations.
In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments - A consensus of the FASB Emerging Issues Task Force.” The update was issued with the objective

5



of reducing the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230 and other topics. This ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The adoption of ASU No. 2016-15 is not expected to have a material impact on our consolidated financial condition and results of operations.
In October 2016, the FASB issued ASU No. 2016-16, "Income Taxes (Topic 740) Intra-Entity Transfers of Assets Other Than Inventory." The ASU guidance requires the recognition of the income tax consequences of an intercompany asset transfer, other than transfers of inventory, when the transfer occurs. For intercompany transfers of inventory, the income tax effects will continue to be deferred until the inventory has been sold to a third party. The ASU is effective for reporting periods beginning after December 15, 2017, with early adoption permitted. We are currently evaluating the impact of ASU No. 2016-16 on our consolidated financial condition and results of operations.
In November 2016, the FASB issued ASU No. 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash." The amendments in this ASU require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The ASU is effective for reporting periods beginning after December 15, 2017, including interim periods with those fiscal years. The adoption of ASU No. 2016-18 is not expected to have a material impact on our consolidated financial condition and results of operations.
In January 2017, the FASB issued ASU No. 2017-01, "Business Combinations (Topic 805): "Clarifying the Definition of a Business." The ASU clarifies the definition of a business and provides guidance on evaluating as to whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition clarification as outlined in this ASU affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The amendments of the ASU are effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. The adoption of ASU No. 2017-01 is not expected to have a material impact on our consolidated financial condition and results of operations.
In January 2017, the FASB issued ASU No. 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment." The amendments in this ASU allow companies to apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit’s carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The amendments of the ASU are effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We are currently evaluating the impact of ASU No. 2017- 04 on our consolidated financial condition and results of operations.
In February 2017, the FASB issued ASU No. 2017-05, "Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets." The FASB issued this ASU to clarify the scope of subtopic 610-20, which the FASB had failed to define in its issuance of ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)." ASU No. 2017-05 will be effective concurrently with ASU No. 2014-09. Similarly to ASU 2014-09, we are continuing our evaluation of ASU No. 2017-05 to determine the impact on our consolidated financial condition and results of operations.
On March 10, 2017, the FASB issued ASU No. 2017-07, "Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost." The amendments of this ASU provide additional guidance intended to improve the presentation of net benefit costs pension costs and net periodic postretirement costs. The amendments of the ASU must be applied to annual reporting periods beginning after December 15, 2017, and to quarterly periods in 2018, early adoption of the standard is permitted. We are currently evaluating the impact of ASU No. 2017- 07 on our consolidated financial condition and results of operations.
2.
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, 2,832,115 were available for issuance as of March 31, 2017. In 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 ("55/10 Provision"). As of March 31, 2017, 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, except for awards related to the 55/10 Provision which are expensed in the period granted. We had unearned compensation of $25.0

6



million and $15.2 million at March 31, 2017 and December 31, 2016, 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, 2017 and 2016 was $25.7 million and $36.4 million, respectively.
We recorded stock-based compensation expense of $7.5 million ($11.3 million pre-tax) and $10.5 million ($16.0 million pre-tax) for the three months ended March 31, 2017 and 2016, respectively.
The following table summarizes information regarding Restricted Shares:
 
Three Months Ended March 31, 2017
 
Shares
 
Weighted Average
Grant-Date Fair
Value
Number of unvested shares:
 
 
 
Outstanding - January 1, 2017
1,259,275

 
$
50.77

Granted
523,235

 
50.49

Vested
(423,523
)
 
60.69

Canceled
(128,281
)
 
47.97

Outstanding as of March 31, 2017
1,230,706

 
$
47.53


Unvested Restricted Shares outstanding as of March 31, 2017, includes approximately 872,000 units with performance-based vesting provisions. Performance-based units are issuable in common stock and vest upon the achievement of pre-defined performance targets. Performance-based units granted prior to 2017 have performance targets 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. Performance-based units granted in 2017 have performance targets based on our average return on invested capital and our total shareholder return ("TSR") over a three-year period as compared with the same measures for a defined peer group for the same period. Most units were granted in three annual grants since January 1, 2015 and have a vesting percentage between 0% and 200% depending on the achievement of the specific performance targets. Except for shares granted under the 55/10 Provision, compensation expense is recognized ratably over a cliff-vesting period of 36 months, based on the fair value of our common stock on the date of grant, as adjusted for actual forfeitures. During the performance period, earned and unearned compensation expense is adjusted based on changes in the expected achievement of the performance targets for all performance-based units granted except for the TSR-based units. Vesting provisions range from 0 to approximately 1,670,000 shares based on performance targets. As of March 31, 2017, we estimate vesting of approximately 636,000 shares based on expected achievement of performance targets.
3.
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 2016 Annual Report and Note 5 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.
We had no foreign exchange contracts designated as hedging instruments as of March 31, 2017, compared to a notional value of $0.6 million as of December 31, 2016. Foreign exchange contracts with third parties not designated as hedging instruments had a notional value of $387.0 million and $393.2 million at March 31, 2017 and December 31, 2016, respectively. At March 31, 2017, the length of foreign exchange contracts currently in place ranged from three days to 20 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.

7



The fair value of foreign exchange contracts not designated as hedging instruments are summarized below:
 
March 31,
 
December 31,
(Amounts in thousands)
2017
 
2016
Current derivative assets
$
2,909

 
$
682

Current derivative liabilities
3,210

 
6,878

Noncurrent derivative liabilities
114

 
355

 
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)
2017
 
2016
Gain recognized in income
$
1,897

 
$
2,061

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 4 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 consolidated 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, 2017 or March 31, 2016.
4.
Debt
Debt, including capital lease obligations, consisted of:
 
March 31,
 
  December 31,  
(Amounts in thousands, except percentages)
2017
 
2016
1.25% EUR Senior Notes due March 17, 2022, net of unamortized discount and debt issuance costs of $5,556 and $5,748
$
526,894

 
$
519,902

4.00% USD Senior Notes due November 15, 2023, net of unamortized discount and debt issuance costs of $2,878 and $2,972
297,122

 
297,028

3.50% USD Senior Notes due September 15, 2022, net of unamortized discount and debt issuance costs of $3,696 and $3,848
496,304

 
496,152

Term Loan Facility, interest rate of 2.40% at March 31, 2017 and 2.25% at December 31, 2016, net of debt issuance costs of $653 and $745
209,347

 
224,255

Capital lease obligations and other borrowings
38,514

 
33,286

Debt and capital lease obligations
1,568,181

 
1,570,623

Less amounts due within one year
90,632

 
85,365

Total debt due after one year
$
1,477,549

 
$
1,485,258


Senior Credit Facility
As discussed in Note 10 to our consolidated financial statements included in our 2016 Annual Report, our credit agreement provides for an initial $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, 2017 and December 31, 2016, we had no amounts outstanding under the Revolving Credit Facility. We had outstanding letters of credit of $89.6 million and $102.6 million at March 31, 2017 and December 31, 2016, respectively. As of March 31, 2017 and December 31, 2016, due to a financial covenant in the Senior Credit Facility, the amount available for borrowings under our Revolving Credit Facility was effectively limited to $419.8 million and $553.5 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, 2017.
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, 2017. During the three months ended March 31, 2017, 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.
5.
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 3.
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 4. The estimated fair value of our Senior Notes at March 31, 2017 was $1,348.5 million compared to the carrying value of $1,320.3 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, 2017 and December 31, 2016.
6.
Inventories
Inventories, net consisted of the following:
 
March 31,
 
  December 31,  
(Amounts in thousands)
2017
 
2016
Raw materials
$
361,685

 
$
348,012

Work in process
655,564

 
633,352

Finished goods
225,883

 
220,912

Less: Progress billings
(214,104
)
 
(216,396
)
Less: Excess and obsolete reserve
(71,908
)
 
(66,629
)
Inventories, net
$
957,120

 
$
919,251




8



7.
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)
2017
 
2016
Net earnings of Flowserve Corporation
$
14,823

 
$
37,859

Dividends on restricted shares not expected to vest

 
2

Earnings attributable to common and participating shareholders
$
14,823

 
$
37,861

Weighted average shares:
 
 
 
Common stock
130,393

 
129,781

Participating securities
169

 
361

Denominator for basic earnings per common share
130,562

 
130,142

Effect of potentially dilutive securities
713

 
670

Denominator for diluted earnings per common share
131,275

 
130,812

Earnings per common share:
 
 
 
Basic
$
0.11

 
$
0.29

Diluted
0.11

 
0.29


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.
 
8.
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

9



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 2016 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 have completed our response to the subpoena.  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.
9.
Retirement and Postretirement Benefits
Components of the net periodic cost for retirement and postretirement benefits for the three months ended March 31, 2017 and 2016 were as follows:
 
U.S.
Defined Benefit Plans
 
Non-U.S.
Defined Benefit Plans
 
Postretirement
Medical Benefits
(Amounts in millions) 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
Service cost
$
6.2

 
$
5.9

 
$
1.7

 
$
1.8

 
$

 
$

Interest cost
4.3

 
4.8

 
2.2

 
2.9

 
0.2

 
0.3

Expected return on plan assets
(6.2
)
 
(6.1
)
 
(2.1
)
 
(2.7
)
 

 

Amortization of prior service cost

 
0.1

 

 

 

 

Amortization of unrecognized net loss (gain)
1.5

 
1.2

 
0.9

 
1.3

 
0.1

 
(0.1
)
Net periodic cost recognized
$
5.8

 
$
5.9

 
$
2.7

 
$
3.3

 
$
0.3

 
$
0.2

 
10.
Shareholders’ Equity
Dividends – 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. 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 for the three months ended March 31, 2017 and 2016. As of March 31, 2017 we had $160.7 million of remaining capacity under our current share repurchase program.
11.
Income Taxes
For the three months ended March 31, 2017, we earned $21.8 million before taxes and provided for income taxes of $6.8 million resulting in an effective tax rate of 31.0%. The effective tax rate varied from the U.S. federal statutory rate for the three months ended March 31, 2017 primarily due to the net impact of foreign operations.
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.
As of March 31, 2017, the amount of unrecognized tax benefits increased by $3.4 million from December 31, 2016. With limited exception, we are no longer subject to U.S. federal income tax audits for years through 2014, state and local income tax audits for years through 2010 or non-U.S. income tax audits for years through 2009. We are currently under examination for various years in Austria, Germany, India, Italy, Singapore, 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 $8 million within the next 12 months.
12.
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, 2017
 (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
$
414,381

 
$
169,999

 
$
279,246

 
$
863,626

 
$

 
$
863,626

Intersegment sales
7,592

 
8,378

 
1,191

 
17,161

 
(17,161
)
 

Segment operating income (loss)
44,582

 
(14,191
)
 
40,094

 
70,485

 
(23,469
)
 
47,016

 
 
 
 
 
 
 
 
 
 
 
 
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

 

10



13.
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, 2017 and 2016:
 
2017
 
2016
(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
$
(485,568
)
 
$
(136,530
)
 
$
(1,238
)
 
$
(623,336
)
 
$
(413,422
)
 
$
(120,461
)
 
$
(3,458
)
 
$
(537,341
)
Other comprehensive income (loss) before reclassifications
36,171

 
(1,152
)
 
80

 
35,099

 
33,757

 
1,060

 
529

 
35,346

Amounts reclassified from AOCL

 
1,636

 
23

 
1,659

 

 
1,726

 
114

 
1,840

Net current-period other comprehensive income
36,171

 
484

 
103

 
36,758

 
33,757

 
2,786

 
643

 
37,186

Balance - March 31
$
(449,397
)
 
$
(136,046
)
 
$
(1,135
)
 
$
(586,578
)
 
$
(379,665
)
 
$
(117,675
)
 
$
(2,815
)
 
$
(500,155
)
_______________________________________
(1) Includes foreign currency translation adjustments attributable to noncontrolling interests of $3.4 million and $2.7 million at January 1, 2017 and 2016, respectively, and $3.9 million and $3.5 million at March 31, 2017 and 2016, respectively. Includes net investment hedge losses of $0.8 million and $12.5 million, net of deferred taxes, for the three months ended March 31, 2017 and 2016, respectively. Amounts in parentheses indicate debits.

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
2017(1)
 
2016
Cash flow hedging activity
 
 
 
 
Foreign exchange contracts
 
 
 
 
 
Sales
$
(30
)
 
$
(154
)
 
Tax benefit
7

 
40

 
 Net of tax
$
(23
)
 
$
(114
)
 
 
 
 
 
Pension and other postretirement effects
 
 
 
 
Amortization of actuarial losses(2)
 
$
(2,397
)
 
$
(2,313
)
  Prior service costs(2)
 
(57
)
 
(152
)


Tax benefit
818

 
739



Net of tax
$
(1,636
)
 
$
(1,726
)
_______________________________________
(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 9 for additional details.
 
 

11



14.
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 . 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, the transfer of activities from high-cost regions to lower-cost facilities and the divestiture of certain non-strategic assets.
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 COS or 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 in 2017.
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, 2017
 (Amounts in thousands)
Engineered Product Division
 
Industrial Product Division
 
Flow Control Division
 
Subtotal–Reportable Segments
 
Eliminations and All Other
 
Consolidated Total
Restructuring Charges
 
 
 
 
 
 
 
 
 
 
 
     COS
$
(2,674
)
 
$
4,771

 
$
(32
)
 
$
2,065

 
$

 
$
2,065

     SG&A
(781
)
 
89

 
124

 
(568
)
 
11

 
(557
)
 
$
(3,455
)
 
$
4,860

 
$
92

 
$
1,497

 
$
11

 
$
1,508

Non-Restructuring Charges
 

 
 

 
 

 
 
 
 
 
 

     COS
$
1,101

 
$
1,438

 
$
433

 
$
2,972

 
$

 
$
2,972

     SG&A
714

 
3,606

 
547

 
4,867

 
1,164

 
6,031

 
$
1,815

 
$
5,044

 
$
980

 
$
7,839

 
$
1,164

 
$
9,003

Total Realignment Charges
 
 
 
 
 
 
 
 
 
 
 
     COS
$
(1,573
)
 
$
6,209

 
$
401

 
$
5,037

 
$

 
$
5,037

     SG&A
(67
)
 
3,695

 
671

 
4,299

 
1,175

 
$
5,474

Total
$
(1,640
)
 
$
9,904

 
$
1,072

 
$
9,336

 
$
1,175

 
$
10,511

 
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

 
$
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

Total
$
3,805

 
$
3,929

 
$
5,591

 
$
13,325

 
$
146

 
$
13,471

 

12




The following is a summary of total inception to date charges, net of adjustments, related to the Realignment Programs:
 
Inception to Date
 (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
$
32,037

 
$
45,419

 
$
13,957

 
$
91,413

 
$

 
$
91,413

     SG&A
17,036

 
15,686

 
9,676

 
42,398

 
29

 
42,427

     Income tax expense(2)
9,400

 
9,300

 
1,800

 
20,500

 

 
20,500

 
$
58,473

 
$
70,405

 
$
25,433

 
$
154,311

 
$
29

 
$
154,340

Non-Restructuring Charges
 

 
 

 
 

 
 
 
 
 
 

     COS
$
17,261

 
$
15,621

 
$
12,366

 
$
45,248

 
$
8

 
$
45,256

     SG&A
10,707

 
11,816

 
5,386

 
27,909

 
5,596

 
33,505

 
$
27,968

 
$
27,437

 
$
17,752

 
$
73,157

 
$
5,604

 
$
78,761

Total Realignment Charges
 
 
 
 
 
 
 
 
 
 
 
     COS
$
49,298

 
$
61,040

 
$
26,323

 
$
136,661

 
$
8

 
$
136,669

     SG&A
27,743

 
27,502

 
15,062

 
70,307

 
5,625

 
75,932

     Income tax expense(2)
9,400

 
9,300

 
1,800

 
20,500

 

 
20,500

Total
$
86,441

 
$
97,842

 
$
43,185

 
$
227,468

 
$
5,633

 
$
233,101

____________________________
(1) Includes $48.2 million of restructuring charges, primarily COS, related to the R1 Realignment Program.
(2) Income tax expense includes exit taxes as well as non-deductible costs.
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, divestiture of certain non-strategic 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, 2017
 (Amounts in thousands)
Severance
 
Contract Termination
 
Asset Write-Downs
 
Other
 
Total
     COS
$
(3,757
)
 
$
137

 
$
4,953

 
$
732

 
$
2,065

     SG&A
(1,319
)
 

 
352

 
410

 
(557
)
Total
$
(5,076
)
 
$
137

 
$
5,305

 
$
1,142

 
$
1,508

 
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

Total
$
3,817

 
$

 
$
954

 
$
951

 
$
5,722



13



The following is a summary of total inception to date restructuring charges, net of adjustments, related to the Realignment Programs:
 
Inception to Date
 (Amounts in thousands)
Severance
 
Contract Termination
 
Asset Write-Downs
 
Other
 
Total (1)
     COS(1)
$
68,187

 
$
746

 
$
13,870

 
$
8,610

 
$
91,413

     SG&A
29,448

 
43

 
1,780

 
11,156

 
42,427

     Income tax expense(2)

 

 

 
20,500

 
20,500

Total
$
97,635

 
$
789

 
$
15,650

 
$
40,266

 
$
154,340

_______________________________
(1) Includes $48.2 million of restructuring charges, primarily COS, related to the R1 Realignment Program.
(2) Income tax expense includes exit taxes as well as non-deductible costs.

The following represents the activity, primarily severance, related to the restructuring reserve for the Realignment Programs for the three months ended March 31, 2017 and 2016:
 
2017
 
2016
(Amounts in thousands)
R1 Realignment Program
 
R2 Realignment Program
 
Total
 
R1 Realignment Program
 
R2 Realignment Program
 
Total
Balance at December 31
$
12,594

 
$
47,733

 
$
60,327

 
$
25,156

 
$
33,147

 
$
58,303

Charges, net of adjustments
(3,431
)
 
(503
)
 
(3,934
)
 
976

 
3,792

 
4,768

Cash expenditures
(4,124
)
 
(7,070
)
 
(11,194
)
 
(1,294
)
 
(3,999
)
 
(5,293
)
Other non-cash adjustments, including currency
3,038

 
(1,712
)
 
1,326

 
(877
)
 
(1,162
)
 
(2,039
)
Balance at March 31
$
8,077

 
$
38,448

 
$
46,525

 
$
23,961

 
$
31,778

 
$
55,739

 
 
 
 
    
15.
Subsequent Event
On March 31, 2017, we signed a conditional sale and purchase agreement to sell our Flow Control Division's ("FCD") Gestra AG ("Gestra") business to a leading provider of steam system solutions for €186 million. The sale will include Gestra’s manufacturing facility in Germany as well as related operations in the U.S., the United Kingdom ("U.K."), Spain, Poland, Italy, Singapore and Portugal. In 2016, Gestra recorded revenues of approximately €92 million with earnings before interest and taxes of approximately €15 million. We believe the transaction will be completed in May 2017. Although the timing of the completed transaction and the balance sheet at the closing date will determine the exact amount, we currently estimate a gain on the sale in excess of €40 million.

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 2016 Annual Report.

14



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 18,000 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 182 QRCs located around the globe, provides a variety of service offerings for our customers including spare parts, 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 leverage our QRC network 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 the first three months of 2017, our financial results continued to be challenged by capital spending declines, primarily in the oil and gas industry, and pricing pressures. Although there has been stability in oil prices over recent quarters, we anticipate that the current environment will persist throughout 2017, potentially improving in the second half of this year.
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, transfer of activities from high-cost regions to lower-cost facilities and the divestiture of certain non-strategic assets. At the completion of the programs, we expect a 15% to 20% reduction in our global workforce, relative to early 2015 workforce

15



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, 2017 and 2016
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 2015, we initiated Realignment Programs that consist of both restructuring and non-restructuring charges that are further discussed in Note 14 included in this Quarterly Report. The Realignment Programs will continue throughout 2017 and the total charges for Realignment Programs by segment are detailed below for the three months ended March 31, 2017 and 2016:
 
Three Months Ended March 31, 2017
 (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
$
(1,573
)
 
$
6,209

 
$
401

 
$
5,037

 
$

 
$
5,037

     SG&A
(67
)
 
3,695

 
671

 
4,299

 
1,175

 
5,474

Total
$
(1,640
)
 
$
9,904

 
$
1,072

 
$
9,336

 
$
1,175

 
$
10,511

    
 
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

Total
$
3,805

 
$
3,929

 
$
5,591

 
$
13,325

 
$
146

 
$
13,471

 
 
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 $233.1 million and we expect to incur the majority of the remaining charges throughout 2017.
Based on actions under our Realignment Programs, we estimate that we have achieved cost savings of approximately $44 million for the three months ended March 31, 2017, as compared with $16 million in the same period of 2016. Approximately $28 million of those savings are in COS with the remainder in SG&A. Upon completion of the Realignment Programs, we expect run-rate cost savings of approximately $230 million, of which approximately $190 million would be 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)
2017
 
2016
Bookings
$
958.2

 
$
921.8

Sales
863.6

 
947.2

 

16



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, 2017 increased by $36.4 million, or 3.9%, as compared with the same period in 2016 and included an order for approximately $80 million to provide pumps and related equipment for the Hengli Integrated Refining Complex Project in China. The increase included negative currency effects of approximately $12 million. The increase was primarily driven by the oil and gas industry, partially offset by decreases in the power generation and general industries. The increase was primarily due to customer original equipment bookings.
Sales for the three months ended March 31, 2017 decreased by $83.6 million, or 8.8%, as compared with the same period in 2016. The decrease included negative currency effects of approximately $10 million. The decrease was more heavily weighted toward original equipment sales with decreased sales into every region except for Europe. Net sales to international customers, including export sales from the U.S., were approximately 64% and 62% of total sales for the three months ended March 31, 2017 and 2016, 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 $2,004.3 million at March 31, 2017 increased by $106.6 million, or 5.6%, as compared with December 31, 2016. Currency effects provided an increase of approximately $22 million. Approximately 31.1% of the backlog at March 31, 2017 was related to aftermarket orders.

Gross Profit and Gross Profit Margin
 
Three Months Ended March 31,
(Amounts in millions, except percentages)
2017
 
2016
Gross profit
$
263.9

 
$
308.0

Gross profit margin
30.6
%
 
32.5
%
 
Gross profit for the three months ended March 31, 2017 decreased by $44.1 million, or 14.3%, as compared with the same period in 2016. Gross profit margin for the three months ended March 31, 2017 of 30.6% decreased from 32.5% for the same period in 2016. 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 a mix shift to higher margin aftermarket sales and decreased charges and increased savings related to our Realignment Programs compared to the same period in 2016. Aftermarket sales increased to approximately 47% of total sales, as compared with approximately 45% of total sales for the same period in 2016.

Selling, General and Administrative Expense
 
Three Months Ended March 31,
(Amounts in millions, except percentages)
2017
 
2016
SG&A
$
222.0

 
$
236.9

SG&A as a percentage of sales
25.7
%
 
25.0
%
 
SG&A for the three months ended March 31, 2017 decreased by $14.9 million, or 6.3%, as compared with the same period in 2016. Currency effects yielded a decrease of approximately $2 million. SG&A as a percentage of sales for the three months ended March 31, 2017 increased 70 basis points as compared with the same period in 2016 due to lower sales leverage, partially offset by decreased charges and increased savings related to our Realignment Programs compared to the same period in 2016.
Net Earnings from Affiliates
    
 
Three Months Ended March 31,
(Amounts in millions)
2017
 
2016
Net earnings from affiliates
$
5.2

 
$
3.3

 
Net earnings from affiliates for the three months ended March 31, 2017 increased $1.9 million, or 57.6%, as compared with the same period in 2016. The increase was primarily a result of increased earnings of our EPD joint venture in South Korea.


17



Operating Income and Operating Margin
 
Three Months Ended March 31,
(Amounts in millions, except percentages)
2017
 
2016
Operating income
$
47.0

 
$
74.4

Operating income as a percentage of sales
5.4
%
 
7.9
%
 
Operating income for the three months ended March 31, 2017 decreased by $27.4 million, or 36.8%, as compared with the same period in 2016. The decrease included negative currency effects of approximately $3 million. The decrease was primarily a result of the $44.1 million decrease in gross profit, partially offset by a $14.9 million decrease in SG&A.

Interest Expense and Interest Income
 
Three Months Ended March 31,
(Amounts in millions)
2017
 
2016
Interest expense
$
(14.7
)
 
$
(14.6
)
Interest income
0.6

 
0.7

 
Interest expense and interest income for the three months ended March 31, 2017 remained relatively constant compared with the same period in 2016.

Other Expense, Net
 
Three Months Ended March 31,
(Amounts in millions)
2017
 
2016
Other expense, net
$
(11.1
)
 
$
(4.5
)
 
Other expense, net for the three months ended March 31, 2017 increased $6.6 million as compared with the same period in 2016, due primarily to a $7.3 million increase in losses from transactions in currencies other than our sites' functional currencies. The net change was primarily due to the foreign currency exchange rate movements in the Mexican peso, Euro, Indian rupee and Brazilian real in relation to the U.S. dollar during the three months ended March 31, 2017, as compared with the same period in 2016.

Tax Expense and Tax Rate
 
Three Months Ended March 31,
(Amounts in millions, except percentages)
2017
 
2016
Provision for income taxes
$
6.8

 
$
17.7

Effective tax rate
31.0
%
 
31.6
%
 
The effective tax rate of 31.0% for the three months ended March 31, 2017 decreased from 31.6% for the same period in 2016. The effective tax rate varied from the U.S. federal statutory rate for the three months ended March 31, 2017 primarily due to the net impact of foreign operations.


18



Other Comprehensive Income
 
Three Months Ended March 31,
(Amounts in millions)
2017
 
2016
Other comprehensive income
$
36.8

 
$
37.2

 
Other comprehensive income for the three months ended March 31, 2017 decreased $0.4 million from $37.2 million in 2016.

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 and general industries. EPD operates in 47 countries with 32 manufacturing facilities worldwide, 10 of which are located in Europe, 10 in North America, seven in Asia and five in Latin America, and it operates 124 QRCs, including those co-located in manufacturing facilities and/or shared with FCD.
 
Three Months Ended March 31,
(Amounts in millions, except percentages)
2017
 
2016
Bookings
$
460.9

 
$
424.5

Sales
422.0

 
473.8

Gross profit
133.8

 
158.0

Gross profit margin
31.7
%
 
33.3
%
Segment operating income
44.6

 
58.4

Segment operating income as a percentage of sales
10.6
%
 
12.3
%
 
Bookings for the three months ended March 31, 2017 increased by $36.4 million, or 8.6%, as compared with the same period in 2016 and included an order for approximately $80 million to provide pumps and related equipment for the Hengli Integrated Refining Complex Project in China. The increase included negative currency effects of approximately $5 million. The increase in customer bookings was primarily driven by the oil and gas and chemical industries, partially offset by a decrease in the power generation and general industries. Increased bookings of $64.9 million into Asia Pacific were partially offset by decreased bookings of $13.3 million into Europe, $6.5 million into North America, $5.8 million into the Middle East and $3.2 million into Africa. The increase was more heavily weighted towards customer original equipment bookings. Interdivision bookings (which are eliminated and are not included in consolidated bookings as disclosed above) increased $1.8 million.
Sales for the three months ended March 31, 2017 decreased $51.8 million, or 10.9%, as compared with the same period in 2016. The decrease included negative currency effects of approximately $5 million. The decrease was due to lower customer original equipment sales, resulting from decreased sales of $33.9 million into North America, $12.6 million into Latin America, and $5.8 million into Africa. Interdivision sales (which are eliminated and are not included in consolidated sales as disclosed above) decreased $2.0 million.
Gross profit for the three months ended March 31, 2017 decreased by $24.2 million, or 15.3%, as compared with the same period in 2016. Gross profit margin for the three months ended March 31, 2017 of 31.7% decreased from 33.3% for the same period in 2016. The decrease in gross profit margin was primarily attributable 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 decreased charges related to our Realignment Programs compared to the same period in 2016 and a mix shift to higher margin aftermarket sales.
Operating income for the three months ended March 31, 2017 decreased by $13.8 million, or 23.6%, as compared with the same period in 2016. The decrease included negative currency effects of approximately $3 million. The decrease was due to a

19



$24.2 million decrease in gross profit, partially offset by a $8.4 million decrease in SG&A (including a decrease due to currency effects of approximately one million). The decrease in SG&A is primarily due to decreased charges and increased savings achieved related to our Realignment Programs compared to the same period in 2016.
Backlog of $1,014.1 million at March 31, 2017 increased by $47.3 million, or 4.9%, as compared with December 31, 2016. Currency effects provided an increase of approximately $14 million. Backlog at March 31, 2017 and December 31, 2016 included $12.3 million and $11.7 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 operates in the oil and gas, chemical, power generation and general industries. IPD operates 18 manufacturing facilities, five of which are located in the U.S, nine in Europe and four in Asia and it operates 30 QRCs worldwide, including 19 sites in Europe, six in the U.S., three in Asia and two in Latin America, including those co-located in manufacturing facilities.
 
Three Months Ended March 31,
(Amounts in millions, except percentages)
2017
 
2016
Bookings
$
206.7

 
$
207.7

Sales
178.4

 
197.5

Gross profit
34.5

 
50.2

Gross profit margin
19.3
 %
 
25.4
%
Segment operating (loss) income
(14.2
)
 
4.0

Segment operating (loss) income as a percentage of sales
(8.0
)%
 
2.0
%
 
Bookings for the three months ended March 31, 2017 decreased by $1.0 million, or 0.5%, as compared with the same period in 2016. The decrease included negative currency effects of approximately $3 million. The decrease in customer bookings was primarily driven by the chemical and power generation industries, substantially offset by an increase in the oil and gas industry. Decreased bookings of $6.6 million into Asia Pacific and $4.1 million into the Middle East were substantially offset by increased bookings of $10.7 million into North America. Interdivision bookings (which are eliminated and are not included in consolidated bookings as disclosed above) decreased $2.6 million.
Sales for the three months ended March 31, 2017 decreased $19.1 million, or 9.7%, as compared with the same period in 2016. The decrease included negative currency effects of approximately $3 million and was primarily driven by decreased customer original equipment sales. Customer sales decreased $18.3 million into North America and $1.0 million into Asia Pacific. Interdivision sales (which are eliminated and are not included in consolidated sales as disclosed above) decreased $2.4 million when compared to the same period in 2016.
Gross profit for the three months ended March 31, 2017 decreased by $15.7 million, or 31.3%, as compared with the same period in 2016. Gross profit margin for the three months ended March 31, 2017 of 19.3% decreased from 25.4% for the same period in 2016. The decrease in gross profit margin was primarily attributable to increased charges related to our Realignment Programs and the negative impact of decreased sales on our absorption of fixed manufacturing costs, partially offset by a mix shift to higher margin aftermarket sales.
Operating loss for the three months ended March 31, 2017 increased by $18.2 million, to a loss of $14.2 million, as compared with income of $4.0 million for the same period in 2016. The increase included currency benefits of less than one million. The increased loss was primarily due to the $15.7 million decrease in gross profit and a $2.2 million increase in SG&A (including a decrease due to currency effects of approximately one million). The increase in SG&A is primarily due to increased charges related to our Realignment Programs.
Backlog of $402.4 million at March 31, 2017 increased by $28.9 million, or 7.7%, as compared with December 31, 2016. Currency effects provided an increase of approximately $3 million. Backlog at March 31, 2017 and December 31, 2016 included $14.0 million and $14.2 million, respectively, of interdivision backlog (which is eliminated and not included in consolidated backlog as disclosed above).

20



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 third largest industrial valve supplier on a global basis.
 
Three Months Ended March 31,
(Amounts in millions, except percentages)
2017
 
2016
Bookings
$
309.8

 
$
310.1

Sales
280.4

 
299.0

Gross profit
96.6

 
99.0

Gross profit margin
34.5
%
 
33.1
%
Segment operating income
40.1

 
38.9

Segment operating income as a percentage of sales
14.3
%
 
13.0
%
 
Bookings for the three months ended March 31, 2017 were flat compared with the same period in 2016. Bookings included negative currency effects of approximately $4 million. Decreased customer bookings in the general industries were substantially offset by increases in the oil and gas and power generation industries. Decreased customer bookings of $11.1 million into Latin America, $8.4 million into North America and $5.0 million into the Middle East were substantially offset by increased customer bookings of $15.8 million into Asia Pacific, $5.7 million into Europe and $1.8 million into Africa.
Sales for the three months ended March 31, 2017 decreased $18.6 million, or 6.2%, as compared with the same period in 2016. The decrease included negative currency effects of approximately $2 million and was primarily driven by decreased customer original equipment sales. Decreased customer sales of $13.5 million into the Middle East and $7.8 million into Asia Pacific were partially offset by increased sales of $3.3 million into Europe.
Gross profit for the three months ended March 31, 2017 decreased by $2.4 million, or 2.4%, as compared with the same period in 2016. Gross profit margin for the three months ended March 31, 2017 of 34.5% increased from 33.1% for the same period in 2016. The increase in gross profit margin was primarily attributable to the savings achieved and decreased charges related to our Realignment Programs compared to the same period in 2016.
Operating income for the three months ended March 31, 2017 increased by $1.2 million, or 3.1%, as compared with the same period in 2016. The increase included negative currency effects of less than a million. The increase was primarily attributable to decreased SG&A of $3.5 million (including a decrease due to currency effects of approximately one million), substantially offset by the $2.4 million decrease in gross profit. The decrease in SG&A was primarily due to savings achieved and decreased charges related to our Realignment Programs and lower selling-related expenses compared to the same period in 2016.
Backlog of $615.3 million at March 31, 2017 increased by $30.8 million, or 5.3%, as compared with December 31, 2016. Currency effects provided an increase of $6 million.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow and Liquidity Analysis
 
Three Months Ended March 31,
(Amounts in millions)
2017
 
2016
Net cash flows provided (used) by operating activities
$
3.9

 
$
(5.7
)
Net cash flows used by investing activities
(15.5
)
 
(20.1
)
Net cash flows used by financing activities
(38.8
)
 
(37.9
)

Existing cash, cash generated by operations and borrowings available under our existing Revolving Credit Facility are our primary sources of short-term liquidity. We monitor the depository institutions that hold our cash and cash equivalents on a regular basis, and we believe that we have placed our deposits with creditworthy financial institutions. Our sources of operating cash

21



generally include the sale of our products and services and the conversion of our working capital, particularly accounts receivable and inventories. Our cash balance at March 31, 2017 was $325.8 million, as compared with $367.2 million at December 31, 2016.
Our cash balance decreased by $41.4 million to $325.8 million at March 31, 2017 as compared with December 31, 2016. The cash used during the first three months of 2017 included $24.8 million in dividend payments, $15.9 million in capital expenditures and $15.0 million of payments on long-term debt.
For the three months ended March 31, 2017, our cash provided by operating activities was $3.9 million, as compared with cash used of $5.7 million for the same period in 2016. Cash flow used by working capital decreased for the three months ended March 31, 2017, due primarily to decreased uses of cash related to inventory and accounts payable, partially offset by decreased source of cash related to accounts receivable and an increased use of cash related to accrued liabilities and income taxes payable as compared to the same period in 2016.
Decreases in accounts receivable provided $66.3 million of cash flow for the three months ended March 31, 2017 as compared with $89.6 million for the same period in 2016. The decrease in accounts receivable was primarily attributable to lower sales during the period as compared to the same period in 2016. As of March 31, 2017 our days’ sales outstanding ("DSO") was 88 days as compared with 91 days as of March 31, 2016.
Increases in inventory used $22.7 million and $69.9 million of cash flow for the three months ended March 31, 2017 and March 31, 2016, respectively. Inventory turns were 2.5 times at March 31, 2017 as compared with 2.3 times for the same period in 2016. Our calculation of inventory turns does not reflect the impact of advanced cash received from our customers. Decreases in accounts payable used $61.9 million of cash flow for the three months ended March 31, 2017 as compared with $89.5 million for the same period in 2016. Decreases in accrued liabilities and income taxes payable used $35.4 million of cash flow for the three months ended March 31, 2017 as compared with $15.0 million for the same period in 2016.
Cash flows used by investing activities during the three months ended March 31, 2017 were $15.5 million as compared with $20.1 million for the same period in 2016. Capital expenditures during the three months ended March 31, 2017 were $15.9 million, a decrease of $4.4 million as compared with the same period in 2016. Our capital expenditures are generally focused on strategic initiatives to pursue new markets, geographic expansion, information technology infrastructure, ongoing scheduled replacements and upgrades and cost reduction opportunities. In 2017, total capital expenditures are expected to be between $80 million and $90 million.
Cash flows used by financing activities during the three months ended March 31, 2017 were $38.8 million as compared with $37.9 million for the same period in 2016. Cash outflows during the three months ended March 31, 2017 resulted primarily from $24.8 million of dividend payments and $15.0 million of payments on long-term debt.
Our Senior Credit Facility matures in October 2020. Approximately 21% of our outstanding Term Loan Facility is due to mature in the remainder of 2017 and approximately 29% in 2018. As of March 31, 2017, we had available capacity of $419.8 million on our $1.0 billion Revolving Credit Facility. Our borrowing capacity is subject to financial covenant limitations based on the terms of our Senior Credit Facility and is also reduced by outstanding letters of credit. Our Revolving Credit Facility is committed and held by a diversified group of financial institutions.

During each of the three months ended March 31, 2017 and 2016 we made no cash contributions to our U.S. pension plan. At December 31, 2016 our U.S. pension plan was fully funded as defined by applicable law. After consideration of our funded status, we currently anticipate making $20 million in contributions to our U.S. pension plan in 2017, excluding direct benefits paid. We continue to maintain an asset allocation consistent with our strategy to maximize total return, while reducing portfolio risks through asset class diversification.
At March 31, 2017, $304.0 million of our total cash balance of $325.8 million was held by foreign subsidiaries, $178.7 million of which we consider permanently reinvested outside the U.S. Based on the expected near-term liquidity needs of our various geographies and our currently available sources of domestic short-term liquidity, we currently do not anticipate the need to repatriate any permanently reinvested cash to fund domestic operations that would generate adverse tax results. However, in the event this cash is needed to fund domestic operations, we estimate the full $178.7 million could be repatriated resulting in a U.S. cash tax liability between $5.0 million and $15.0 million. Should we be required to repatriate this cash, it could limit our ability to assert permanent reinvestment of foreign earnings and invested capital in future periods.
Considering our current debt structure and cash needs, we currently believe cash flows generated from operating activities combined with availability under our Revolving Credit Facility and our existing cash balance will be sufficient to meet our cash needs for the next 12 months. Cash flows from operations could be adversely affected by economic, political and other risks associated with sales of our products, operational factors, competition, fluctuations in foreign exchange rates and fluctuations in interest rates, among other factors. See "Cautionary Note Regarding Forward-Looking Statements" below.

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On November 13, 2014, our Board of Directors approved a $500.0 million share repurchase authorization, of which as of March 31, 2017, we have $160.7 million of remaining capacity. While we intend to continue to return cash through dividends and/or share repurchases for the foreseeable future, any future returns of cash through dividends and/or share repurchases will be reviewed individually, declared by our Board of Directors and implemented by management at its discretion, depending on our financial condition, business opportunities and market conditions at such time.
Financing
Credit Facilities
See Note 10 to our consolidated financial statements included in our 2016 Annual Report and Note 4 to our condensed consolidated financial statements included in this Quarterly Report for a discussion of our Senior Credit Facility and covenants related to our Senior Credit Facility. We complied with all covenants through March 31, 2017.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management’s discussion and analysis of financial condition and results of operations are based on our condensed consolidated financial statements and related footnotes contained within this Quarterly Report. Our critical accounting policies used in the preparation of our condensed consolidated financial statements were discussed in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our 2016 Annual Report. These critical policies, for which no significant changes have occurred in the three months ended March 31, 2017, include:

Revenue Recognition;

Deferred Taxes, Tax Valuation Allowances and Tax Reserves;

Reserves for Contingent Loss;

Retirement and Postretirement Benefits; and

Valuation of Goodwill, Indefinite-Lived Intangible Assets and Other Long-Lived Assets.
The process of preparing condensed consolidated financial statements in conformity with U.S. GAAP requires the use of estimates and assumptions to determine certain of the assets, liabilities, revenues and expenses. These estimates and assumptions are based upon what we believe is the best information available at the time of the estimates or assumptions. The estimates and assumptions could change materially as conditions within and beyond our control change. Accordingly, actual results could differ materially from those estimates. The significant estimates are reviewed quarterly with the Audit Committee of our Board of Directors.
Based on an assessment of our accounting policies and the underlying judgments and uncertainties affecting the application of those policies, we believe that our condensed consolidated financial statements provide a meaningful and fair perspective of our consolidated financial condition and results of operations. This is not to suggest that other general risk factors, such as changes in worldwide demand, changes in material costs, performance of acquired businesses and others, could not adversely impact our consolidated financial condition, results of operations and cash flows in future periods. See "Cautionary Note Regarding Forward-Looking Statements" below.
ACCOUNTING DEVELOPMENTS
We have presented the information about pronouncements not yet implemented in Note 1 to our condensed consolidated financial statements included in this Quarterly Report.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, as amended. Words or phrases such as, "may," "should," "expects," "could," "intends," "plans," "anticipates," "estimates," "believes," "predicts" or other similar expressions are intended to identify forward-looking statements, which include, without limitation, statements concerning our future financial performance, future debt and financing levels, investment objectives, implications of litigation and regulatory investigations and other management plans for future operations and performance.
The forward-looking statements included in this Quarterly Report are based on our current expectations, projections, estimates and assumptions. These statements are only predictions, not guarantees. Such forward-looking statements are subject to numerous risks and uncertainties that are difficult to predict. These risks and uncertainties may cause actual results to differ materially from what is forecast in such forward-looking statements, and include, without limitation, the following:

a portion of our bookings may not lead to completed sales, and our ability to convert bookings into revenues at acceptable profit margins;

changes in the global financial markets and the availability of capital and the potential for unexpected cancellations or delays of customer orders in our reported backlog;

our dependence on our customers' ability to make required capital investment and maintenance expenditures;

risks associated with cost overruns on fixed fee projects and in accepting customer orders for large complex custom engineered products;

the substantial dependence of our sales on the success of the oil and gas, chemical, power generation and water management industries;

the adverse impact of volatile raw materials prices on our products and operating margins;

economic, political and other risks associated with our international operations, including military actions or trade embargoes that could affect customer markets, particularly North African, Russian and Middle Eastern markets and global oil and gas producers, and non-compliance with U.S. export/reexport control, foreign corrupt practice laws, economic sanctions and import laws and regulations;

increased aging and slower collection of receivables, particularly in Latin America and other emerging markets;

our exposure to fluctuations in foreign currency exchange rates, particularly the Euro and British pound and in hyperinflationary countries such as Venezuela;

our furnishing of products and services to nuclear power plant facilities and other critical applications;

potential adverse consequences resulting from litigation to which we are a party, such as litigation involving asbestos-containing material claims;

a foreign government investigation regarding our participation in the United Nations Oil-For-Food Program;

expectations regarding acquisitions and the integration of acquired businesses;

our relative geographical profitability and its impact on our utilization of deferred tax assets, including foreign tax credits;