| | | | | Capital in Excess of Par Value | | Retained Earnings | | | | | | Deferred Compensation Obligation | | Accumulated Industrial Product Division Segment Results Through IPD we design, manufacture, distribute and service engineered, pre-configured industrial pumps and pump systems, including submersible motors and specialty products, collectively referred to as "original equipment." Additionally, IPD manufactures replacement parts and related equipment, and provides a full array of support services, (collectivelycollectively referred to as "aftermarket"). IPD primarily operates in the oil and gas, chemical, water management, power generation and general industries. IPD operates 1213 manufacturing facilities, threefour of which are located in the U.S and six in Europe, and it operates 2019 QRCs worldwide, including 11nine sites in Europe and threefour in the U.S., including those co-located in manufacturing facilities.
| | | IPD | IPD | | 2012 | | 2011 | | 2010 | 2013 (1) | | 2012 | | 2011 | | (Amounts in millions, except percentages) | (Amounts in millions, except percentages) | Bookings | $ | 964.3 |
| | $ | 905.4 |
| | $ | 827.5 |
| $ | 889.1 |
| | $ | 964.3 |
| | $ | 905.4 |
| Sales | 953.9 |
| | 878.2 |
| | 800.2 |
| 950.2 |
| | 953.9 |
| | 878.2 |
| Gross profit | 230.3 |
| | 197.5 |
| | 204.7 |
| 245.3 |
| | 230.3 |
| | 197.5 |
| Gross profit margin | 24.1 | % | | 22.5 | % | | 25.6 | % | 25.8 | % | | 24.1 | % | | 22.5 | % | Segment operating income | 99.5 |
| | 62.9 |
| | 68.5 |
| 115.7 |
| | 99.5 |
| | 62.9 |
| Segment operating income as a percentage of sales | 10.4 | % | | 7.2 | % | | 8.6 | % | 12.2 | % | | 10.4 | % | | 7.2 | % | Backlog (at period end) | 593.0 |
| | 567.8 |
| | 568.0 |
| 530.1 |
| | 593.0 |
| | 567.8 |
|
| | (1) | Includes the post-acquisition operating results of Innomag, which was acquired in December 2013. |
Bookings in 20122013 increaseddecreased by $58.975.2 million, or 6.5%7.8%, as compared with 20112012. This decrease included currency benefits of approximately $4 million. The decrease included the impact of orders in 2012 in excess of $90 million to supply offshore oil and gas platform equipment primarily to an end customer in Latin America. The nonrecurrence of large orders of similar size in 2013 resulted in decreased customer bookings in the oil and gas and general industries, partially offset by an increase in the power generation industry. Customer bookings decreases of $83.4 million into Latin America and $5.1 million into Africa were partially offset by increases of $8.7 million into Europe and $5.6 million into North America. The decrease was driven by customer original equipment bookings. Interdivision bookings (which are eliminated and are not included in consolidated bookings as disclosed above) decreased $5.9 million. Of the $889.1 million of bookings in 2013, approximately 31% were from oil and gas, 29% from general industries, 18% from water management, 14% from chemical and 8% from power generation. Bookings in 2012 increased by $58.9 million, or 6.5%, as compared with 2011. The increase included negative currency effects of approximately $35$35 million. The increase was primarily driven by increased customer bookings in the oil and gas and chemical industries, partially offset by the power industry. The increase included the impact of 2012 orders in excess of $90 million to supply offshore oil and gas platform equipment over the next five years primarily to an end customer in Latin America. Customer bookings increases of $105.2$105.2 million into Latin America and $32.7$32.7 million into North America were partially offset by a decrease of $37.7$37.7 million into Europe and $22.8$22.8 million into Asia Pacific. The increase was more heavily weighted toward customer original
equipment bookings. Interdivision bookings (which are eliminated and are not included in consolidated bookings as disclosed above) decreased $24.7 million.$24.7 million. Of the $964.3$964.3 million of bookings in 2012,, approximately 35% were from oil and gas, 16% from water management, 13% from chemical, 5% from power generation and 31% from general industries. In 2012, opportunities in the chemical industry were driven by inexpensive natural gas in North America and demand for product diversification in the Middle East. Additionally, stable pricing in 2012 promoted investment in both conventional and unconventional oil. BookingsSales in 2011 increased2013 decreased by $77.9$3.7 million, or 9.4%0.4%, as compared with 2010.2012. The increasedecrease included currency benefits of approximately $29$5 million. Customer bookings increases of $49.8 million into Asia Pacific, $12.8 million into Africa and $12.7 million into Europe were partially offset by aThe decrease of $19.4 million into the Middle East and $15.5 million into Latin America. Customer bookings increases werewas driven by general and chemical industries, partially offset by decreased customer bookings in the water management industry. Interdivision bookingsinterdivision sales (which are eliminated and are not included in consolidated bookingssales as disclosed above) increased $32.2 million. Of, which decreased $13.2 million and were partially offset by an increase in customer sales driven by original equipment sales. Increased customer sales of $31.7 million into Latin America and $13.8 million into Africa were partially offset by decreased sales of $22.5 million into the $905.4Middle East, $11.2 million of bookings in 2011, approximately 29% were from oilinto Europe and gas, 19% from water management, 11% from chemical, 8% from power generation and 33% from general industries.$6.0 million into Asia Pacific.
Sales in 2012 increased by $75.7$75.7 million, or 8.6%, as compared with 2011.2011. The increase included negative currency effects of approximately $31$31 million. The increase in customer sales was primarily driven by original equipment sales. Customer sales increases of $35.9$35.9 million into North America, $15.2$15.2 million into the Middle East, $14.3$14.3 million into Asia Pacific and $12.1$12.1 million into Latin America were partially offset by decreased sales of $22.7$22.7 million into Europe. Interdivision sales (which are eliminated and are not included in consolidated sales as disclosed above) increased $14.6 million. Sales in 2011 increased by $78.0 million, or 9.7%, as compared with 2010. The increase included currency benefits of approximately $29 million. The increase was primarily driven by increased aftermarket sales. The increase in customer sales was attributed to the increase of $48.9 million into North America. Interdivision sales (which are eliminated and are not included in consolidated sales as disclosed above) increased $30.0$14.6 million.
Gross profit in 20122013 increased by $32.815.0 million, or 16.6%6.5%, as compared with 20112012. Gross profit margin in 20122013 of 24.1%25.8% increased from 22.5%24.1% in 20112012. The increase was primarily attributable to lower manufacturing costs resulting from our execution of operational improvements. Gross profit in 2012 increased by $32.8 million, or 16.6%, as compared with 2011. Gross profit margin in 2012 of 24.1% increased from 22.5% in 2011. The increase was primarily attributable to $7.1 million of IPD recovery plan realignment charges incurred in 2011 that did not recur in 2012, lower costs resulting from operational improvements and continued realization of realignment savings, partially offset by a sales mix shift to lower margin original equipment sales.
Gross profit in 2011 decreased by $7.2 million, or 3.5%, as compared with 2010. Gross profit margin in 2011 of 22.5% decreased from 25.6% in 2010. The decrease is primarily attributable to less favorable pricing on projects shipped from backlog, increased material costs, charges related to the IPD recovery plan and incremental charges resulting from operational efficiency issues in certain sites, partially offset by increased savings realized from our realignment programs, as compared with the same period in 2010, and a mix shift to higher margin aftermarket sales.34
Operating income for 20122013 increased by $36.616.2 million, or 58.2%16.3%, as compared with 20112012. The increase included currency benefits of approximately $1 million. The increase was due to the $15.0 million increase in gross profit and a $1.2 million decrease in SG&A. Operating income for 2012 increased by $36.6 million, or 58.2%, as compared with 2011. The increase included negative currency effects of approximately $4 million.$4 million. The increase was due to the $32.8$32.8 million increase in gross profit discussed above and a $3.8 million decrease in SG&A. Operating income for 2011 decreased by $5.6 million, or 8.2%, as compared with 2010. The decrease included currency benefits of approximately $2 million. The overall net decrease is due to the $7.2 million decrease in gross profit discussed above, partially offset by a $1.6$3.8 million decrease in SG&A.
Backlog of $593.0530.1 million at December 31, 20122013 increaseddecreased by $25.262.9 million, or 4.4%10.6%, as compared with December 31, 20112012. Currency effects provided an increase of approximately $1310 million. Backlog at December 31, 20122013 included $30.0 million of interdivision backlog (which is eliminated and not included in consolidated backlog as disclosed above). Backlog of $593.0 million at December 31, 2012 increased by $25.2 million, or 4.4%, as compared to December 31, 2011. Currency effects provided an increase of approximately $13 million. Backlog at December 31, 2012 included $40.7 million of interdivision backlog (which is eliminated and not included in consolidated backlog as disclosed above). Backlog of $567.8 million at December 31, 2011 remained flat, as compared to December 31, 2010. Currency effects provided a decrease of approximately $13 million. Backlog at December 31, 2011 included $56.7 million of interdivision backlog (which is eliminated and not included in consolidated backlog as disclosed above). Flow Control Division Segment Results Our second largest business segment is FCD, which designs, manufactures and distributes a broad portfolio of engineered-to-order and configured-to-order isolation valves, control valves, valve automation products, boiler controls and related services. FCD leverages its experience and application know-how by offering a complete menu of engineered services to complement its expansive product portfolio. FCD has a total of 5860 manufacturing facilities and QRCs in 25 countries around the world, with five of its 2527 manufacturing operations located in the U.S. and, 1314 located in Europe.Europe and seven located in Asia Pacific. Based on independent industry sources, we believe that FCD is the fourth largest industrial valve supplier on a global basis.
| | | FCD | FCD | | 2012 | | 2011 | | 2010 (1) | 2013 | | 2012 | | 2011 | | (Amounts in millions, except percentages) | (Amounts in millions, except percentages) | Bookings | $ | 1,526.8 |
| | $ | 1,603.0 |
| | $ | 1,306.6 |
| $ | 1,661.9 |
| | $ | 1,526.8 |
| | $ | 1,603.0 |
| Sales | 1,557.1 |
| | 1,473.3 |
| | 1,197.5 |
| 1,615.7 |
| | 1,557.1 |
| | 1,473.3 |
| Gross profit | 541.4 |
| | 511.5 |
| | 422.3 |
| 579.2 |
| | 541.4 |
| | 511.5 |
| Gross profit margin | 34.8 | % | | 34.7 | % | | 35.3 | % | 35.8 | % | | 34.8 | % | | 34.7 | % | Segment operating income | 253.4 |
| | 233.3 |
| | 180.4 |
| 308.0 |
| | 253.4 |
| | 233.3 |
| Segment operating income as a percentage of sales | 16.3 | % | | 15.8 | % | | 15.1 | % | 19.1 | % | | 16.3 | % | | 15.8 | % | Backlog (at period end) | 723.9 |
| | 759.9 |
| | 658.5 |
| 769.6 |
| | 723.9 |
| | 759.9 |
|
| | (1) | Includes the post-acquisition operating results of Valbart, which was acquired in July 2010. |
Bookings in 20122013 decreasedincreased $76.2135.1 million, or 4.8%8.8%, as compared with 20112012. The increase included currency benefits of approximately $5 million. The increase in customer bookings was primarily attributable to the oil and gas, general and chemical industries, partially offset by a decrease in the power generation industry. Increased customer bookings of $60.1 million into North America, $47.3 million into Latin America, $35.2 million into Europe and $9.6 million in to Asia Pacific were partially offset by a decrease of $16.6 million into the Middle East. The increase was primarily driven by increased customer original equipment bookings. Of the $1.7 billion of bookings in 2013, approximately 32% were from oil and gas, 27% from chemical, 26% from general industries, 13% from power generation and 2% from water management. Bookings in 2012 decreased $76.2 million, or 4.8%, as compared with 2011. The decrease included negative currency effects of approximately $63 million.$63 million. The decrease in customer bookings was primarily attributable to customer project delays in the oil and gas industry and fewer pulp and paper projects in general industries. Customer bookings decreases of $68.6$68.6 million into Europe and $21.9$21.9 million into Latin America were partially offset by an increase of $13.6$13.6 million into the Middle East. The decrease was more heavily weighted toward original equipment bookings. Of the $1.5$1.5 billion of bookings in 2012,, approximately 29% were from oil and gas, 29% from chemical, 27% from general industries, 14% from power generation and 1% from water management. Bookings in 2011 increased $296.4 million, or 22.7%, as compared with 2010. The increase included currency benefits of approximately $54 million and Valbart bookings increases of $110.4 million. The increase in customer bookings was primarily attributable to strength in the oil and gas industry, and increased bookings in the chemical and general industries. Increased bookings were partially offset by decreases in the power generation industry due primarily to a slowdown in global nuclear power projects. Customer bookings increased $98.0 million into Europe, $79.4 into Asia Pacific, $62.7 million into North America and $38.0 million into Latin America. Of the $1.6 billion of bookings in 2011, approximately 31% were from oil and gas, 27% from chemical, 27% from general industries, 14% from power generation and 1% from water management.
Sales in 20122013 increased $83.858.6 million, or 5.7%3.8%, as compared with 20112012. The increase included currency benefits of approximately $6 million. The increase was primarily driven by customer original equipment sales and growth in the oil and gas and power generation industries. Increased sales of $45.9 million into North America, $16.6 million into Europe and $9.6 million into the Middle East were partially offset by a decrease of $14.7 million into Asia Pacific.
Sales in 2012 increased $83.8 million, or 5.7%, as compared with 2011. The increase included negative currency effects of approximately $67$67 million. The increase was primarily driven by customer original equipment sales in the oil and gas and chemical industries. Sales increases of $77.8$77.8 million into Asia Pacific and $47.5$47.5 million into North America were partially offset by a decrease of $42.4$42.4 million into Europe. Sales in 2011 increased $275.8 million, or 23.0%, as compared with 2010. The increase included currency benefits of approximately $48 million. Customer sales increased by approximately $92.7 million into Europe, reflecting continued recovery in the oil and gas industry and included Valbart sales increases of $74.6 million. Customer sales increased by $59.8 million into the Middle East, $49.8 million into Asia Pacific and $47.2 million into North America.
Gross profit in 20122013 increased by $29.937.8 million, or 5.8%7.0% as compared with 20112012. Gross profit margin in 2012as of December 31, 2013 of 35.8% increased from 34.8% for the same period in 2012. The increase was attributable to a more favorable sales mix between original equipment and aftermarket, a shift in product line mix and continued traction of low cost sourcing and cost control initiatives. Gross profit in 2012 increased by $29.9 million, or 5.8% as compared with 2011. Gross profit margin in 2012 of 34.8% was comparable to the same period in 2011. Gross profit in 2011 increased by $89.2 million, or 21.1% as compared with 2010. Gross profit margin in 2011 of 34.7% decreased from 35.3% for the same period in 2010. The decrease was attributable to increased material costs, partially offset by increased sales, which favorably impacted our absorption of fixed manufacturing costs, and various CIP initiatives.2011.
Operating income in 20122013 increased by $20.154.6 million, or 8.6%21.5%, as compared with 20112012. The increase included negative currency effects of approximately $125 million. The increase was primarily attributable to the $28.3 million in pre-tax gains realized from transactions concerning the AIL joint venture, as discussed in Note 2 to our consolidated financial statements included in this Annual Report, and the $37.8 million increase in gross profit, partially offset by a $9.0 million increase in SG&A primarily driven by increased selling and research and development costs. Operating income in 2012 increased by $20.1 million, or 8.6%, as compared with 2011. The increase included negative currency effects of approximately $12 million. The increase was principally attributable to the $29.9$29.9 million increase in gross profit noted above, partially offset by a $7.2$7.2 million increase in SG&A (including a decrease due to currency effects of approximately $11 million)$11 million). Increased SG&A was primarily attributable to increased selling and research and development costs. Operating income in 2011 increased by $52.9 million, or 29.3%, as compared with 2010. The increase included currency benefits of approximately $7 million. The increase was principally attributable to the $89.2 million increase in gross profit discussed above. The increase was partially offset by a $38.8 million increase in SG&A, which was attributable to incremental selling and marketing-related expenses associated with the above mentioned increase in sales, merit-related compensation increases, increased research and development costs and the impact of hiring associates to support high-growth areas of the business.
Backlog of $723.9769.6 million at December 31, 20122013 decreasedincreased by $36.045.7 million, or 4.7%6.3%, as compared towith December 31, 20112012. Currency effects provided an increase of approximately $1 million. Backlog of $723.9 million at December 31, 2012 decreased by $36.0 million, or 4.7%, as compared to December 31, 2011. Currency effects provided a decrease of approximately $3 million.$3 million. Backlog of $759.9 million at December 31, 2011 increased
by $101.4 million, or 15.4%, as compared to December 31, 2010. Currency effects provided a decrease of approximately $24 million.
LIQUIDITY AND CAPITAL RESOURCES Cash Flow Analysis | | | 2012 | | 2011 | | 2010 | 2013 | | 2012 | | 2011 | | (Amounts in millions) | (Amounts in millions) | Net cash flows provided by operating activities | $ | 517.1 |
| | $ | 218.2 |
| | $ | 355.8 |
| $ | 487.8 |
| | $ | 517.1 |
| | $ | 218.2 |
| Net cash flows used by investing activities | (126.4 | ) | | (194.2 | ) | | (286.7 | ) | (168.0 | ) | | (126.4 | ) | | (194.2 | ) | Net cash flows used by financing activities | (428.9 | ) | | (239.0 | ) | | (142.9 | ) | (255.8 | ) | | (428.9 | ) | | (239.0 | ) |
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 generally include the sale of our products and services and the conversion of our working capital, particularly accounts receivable and inventories. Our total cash balance at December 31, 20122013 was$363.8 million, compared with $304.3 million compared withat December 31, 2012 and $337.4 million at December 31, 2011 and $557.6 million at December 31, 2010. Our cash balance decreased by $33.1 million to $304.3 million as of December 31, 2012 as compared with December 31, 2011. The cash used in 2012 included $771.9 million for share repurchases, $135.5 million in capital expenditures, the funding of increased working capital requirements discussed below, $80.0 million in net payments on long-term debt and $73.8 million of dividend payments, partially offset by $498.1 million in proceeds from the issuance of Senior Notes (discussed below).
Our cash provided by operating activities was $517.1487.8 million, $218.2517.1 million and $355.8218.2 million in 2013, 2012 2011 and 2010,2011, respectively, which provided cash to support short-term working capital needs. Working capital increased in 20122013 due primarily to higher inventory of $72.7 million and higher accounts receivable of $35.153.8 million. During 20122013, we contributed $28.146.9 million to our defined benefit pension plans. Working capital increased in 20112012 due primarily to higher inventory of $72.7 million and higher accounts receivable of $243.1 million and higher inventory of $139.8$35.1 million. During 2011,2012, we contributed $27.0$28.1 million to our defined benefit pension plans. Increases in accounts receivable used $35.153.8 million of cash flow in 20122013, as compared with$35.1 million in 2012 and $243.1 million in 2011. The use of cash for accounts receivable in 2013 was directly related to the overall increase in sales, and $52.0 millionincreased aging and slower collection of certain receivables in 2010.Latin America, as compared with 2012. The use of cash for accounts receivable in 2012 was primarily attributable to delays in the collection of accounts receivable due to slower than anticipated payments from certain customers. The use of cash for accounts receivable in 2011 was primarily attributable to delays in the collection of accounts receivable due to slower than anticipated payments from certain customers, relatively strong sales in December 2011, in part due to the completion of certain previously past due projects, and contractually longer payment terms in 2011 as compared to 2010.2011. For the fourth quarter of 20122013, 2012 and 2011, our days' sales outstanding ("DSO") was 75 days as compared with 75 days and 66 days for the same periods in 2011 and 2010, respectively.days. For reference purposes based on 20122013 sales, a DSO
improvement of one day could provide approximately $15 million in cash. We have not experienced a significant increase in customer payment defaults in 2012.2013. IncreasesDecreases in inventory usedprovided $72.728.6 million of cash flow in 20122013 compared with uses of $72.7 million in 2012 and $139.8 million in 2011. The cash provided from inventory in 2013 was primarily due a reduction of delayed shipments and $52.9 millionan increase in 2010.progress billings on large orders at December 31, 2013. The use of cash for inventory in 2012 was primarily due to a decrease in progress billings on large orders at December 31, 2012 and higher raw material inventory needed to support an increased level of bookings. The use of cash for inventory in 2011 was primarily due to shipment delays and growth of short cycle orders during 2011, requiring higher raw material and work in process inventory to support end of period backlog. Inventory turns were 3.23.5 times at December 31, 20122013, compared with 3.4 times at both December 31, 20113.2 and 2010.3.4 times for the same period in 2012 and 2011, respectively. Our calculation of inventory turns does not reflect the impact of advanced cash received from our customers. For reference purposes based on 20122013 data, an improvement of one-tenth of a turn could yield approximately $2624 million in cash.
Cash flows used by investing activities were $168.0 million, $126.4 million and $194.2 million and $286.7 million in 20122013, 20112012 and 20102011, respectively, due primarily to capital expenditures and cash paid for 2011 and 2010 acquisitions.acquisitions, partially offset by cash received from the Audco India, Limited ("AIL") transaction discussed in Note 2 to our consolidated financial statements included in Item 8 of this Annual Report. Capital expenditures duringwere $139.1 million, $135.5 million and $108.0 million in 2013, 2012 were $135.5 million, an increase of $27.6 million as compared withand 2011., respectively. In 2012,2013, our capital expenditures were focused on strategic initiatives to pursue new markets, geographic and capacity expansion, information technology infrastructure and cost reduction opportunities. Cash paid for acquisitions during 2013 was $76.8 million as compared with $4.0 million in 2012 and $90.5 million in 2011. Additionally, in 2013 we sold our 50% equity interest in AIL to the joint venture partner for $46.2 million in cash. Cash flows used by financing activities were $255.8 million in 2013 compared with $428.9 million in 2012 compared withand $239.0 million in 2011 and $142.9 million in 2010. Cash outflows during 20122013 resulted primarily from the repurchase of $771.9458.3 million of our common stock (including the $300.0 million ASR Program payment discussed below), $80.0 million in net payments on long-term debt and $73.876.9 million of dividend payments, partially offset by $498.1298.6 million in net proceeds from the issuance of Senior Notes.senior notes. Cash outflows during
2011 2012 resulted primarily from the repurchase of $150.0$771.9 million of our common stock, payment of $69.6$80.0 million in dividends and $25.0 million ofnet payments on long-term debt.debt and $73.8 million of dividend payments, partially offset by $498.1 million in net proceeds from the issuance of senior notes.
On May 31, 2012, we announced that our Board of Directors endorsed an updateda capital structure strategy designed to make our financial structure more efficient. This capital structure strategy includes: (i) targeting a long-term gross leverage ratio of 1.0x-2.0x total debt to EBITDA through the business cycle, versus then-current gross leverage ratio of 0.7x;cycle; and (ii) an expanded share repurchase program of $1.0 billion, which at authorization included approximately $233 million remaining under the previous repurchase authorization. The expanded share repurchase program includes amounts incremental tohas subsequently been completed. We have maintained our previously-announced policy of annually returning 40% to 50% of running two-year average net earnings to shareholders.shareholders following attainment of the announced target leverage ratio. On February 19, 2013, our Board of Directors approved a $750.0 million share repurchase authorization, which included approximately$193 million of remaining capacity under the previous $1.0 billion share repurchase authorization. As of December 31, 2013, we had $384.4 million of remaining capacity under our current share repurchase program. While we intend to adhere to this policy for the foreseeable future, any future returns of cash whether through any combination of 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 at the time and market conditions. As a part of the $1.0 billion share repurchase program, on June 14, 2012, we entered into an ASR Program with J.P. Morgan Securities LLC, as agent for JPMorgan Chase Bank, N.A., London Branch, under which we agreed to repurchase an aggregate of $300.0 million of our common stock. The ASR Program was completed on December 12, 2012. Note 15 to our consolidated financial statements included in Item 8 of this Annual Report includes a discussion of our share repurchase program, including the ASR Program, and payments of quarterly dividends on our common stock.conditions at such time.
As a part of our continuing effort to execute our capital structure strategy, in the fourth quarter of 2013 we entered into a newamended our existing credit agreement that provides forprovided an aggregate commitment of $1.25 billion, including ainitial $400.0 million term loan facility with a maturity date of August 20, 2017(“Term Loan Facility”) and an $850.0 milliona revolving credit facility with a maturity date of August 20, 2017 (“Revolving Credit Facility” and, together with the Term Loan Facility, the “Senior Credit Facility”). The significant amendments extended the maturity of our Senior Credit Facility by one year to October 4, 2018, increased the Revolving Credit Facility from $850.0 million to $1.0 billion and removed the $300.0 million sublimit for the issuance of performance letters of credit. The Revolving Credit Facility retained its $30.0 million sublimit for swing line loans and all other significant existing terms under the credit agreement remained unchanged. This new agreement providedprovides additional debt capacity to execute on our growth initiatives and enhance our operating flexibility and reduced our borrowing costs.flexibility. Additionally, on September 11, 2012,November 1, 2013, we issued $500.0$300.0 million in aggregate principal amount of Senior Notes,senior notes, which bear an annual stated interest rate of 3.50%4.00% (see Note 10 to our consolidated financial statements included in Item 8 of this Annual Report). Our cash needs for the next 12 months are expected to be less than those of 2012,2013, resulting from a decreased level of anticipated share repurchases and improvements in working capital management, partially offset by increases in pension contributions, incentive compensation payments andincreased cash dividends. We believe cash flows from operating activities, combined with availability under our Revolving Credit Facility and our existing cash balances, will be sufficient to enable us to meet our cash flow needs for the next 12 months. However, cash flows from operations could be adversely affected by a decrease in the rate of general global economic growth, as well as economic, political and other risks associated with sales of our products, operational factors, competition, regulatory actions, fluctuations in foreign currency exchange rates and fluctuations in interest rates, among other factors. We believe that cash flows from operating activities and our expectation of continuing availability to draw upon our credit agreements are also sufficient to meet our cash flow needs for periods beyond the next 12 months.
Payments for Acquisitions We regularly evaluate acquisition opportunities of various sizes. The cost and terms of any financing to be raised in conjunction with any acquisition, including our ability to raise economical capital, is a critical consideration in any such evaluation. Note 2 to our consolidated financial statements included in Item 8 of this this Annual Report contains a discussion of acquisitions. Financing A discussion of our refinanced Senior Credit Facility and our European Letter of Credit ("LOC") Facilitydebt and related covenants is included in Note 10 to our consolidated financial statements included in Item 8 of this this Annual Report. We were in compliance with all covenants as of December 31, 20122013. Certain financing arrangements contain provisions that may result in an event of default if there was a failure under other financing arrangements to meet payment terms or to observe other covenants that could result in an acceleration of payment due. Such provisions are referred to as "cross default" provisions. Each of the Senior Credit Facility, the Senior Notes and the European LOCLetter of Credit ("LOC") Facility is cross-defaulted to the other. The rating agencies assign credit ratings to certain of our debt. Our access to capital markets and costs of debt could be directly affected by our credit ratings. Any adverse action with respect to our credit ratings could generally cause borrowing costs to increase and the potential pool of investors and fundingsfunding sources to decrease. In particular, a decline in credit ratings would increase the cost of borrowing under our Senior Credit Facility.
We have entered into interest rate swap agreements to hedge our exposure to variable interest payments related to our Senior Credit Facility. These agreements are more fully described in Note 6 to our consolidated financial statements included in Item 8 of this Annual Report, and in "Item 7A. Quantitative and Qualitative Disclosures about Market Risk" below. Liquidity Analysis Our cash balance decreasedincreased by $33.159.6 million to $304.3363.8 million as of December 31, 20122013 as compared with December 31, 20112012. The cash usageincrease included $487.8 million in operating cash flows, $771.9298.6 million in proceeds from the issuance of senior notes and $46.2 million in proceeds from the sale of our 50% equity interest in AIL, partially offset by $458.3 million of share repurchases, $135.5139.1 million in capital expenditures, and $73.876.9 million in dividend payments partially offset by $418.1and $76.8 million in net proceeds from issuance of long-term debt.acquisition payments. Approximately 6%11% of our term loanTerm Loan Facility is due to mature in 20132014 and approximately 10%12% in 20142015. Our Senior Credit Facility matures in August 2017.October 2018. After the effects of $275.0140.0 million of notional interest rate swaps, approximately 70%38% of our term debtTerm Loan Facility was at fixed rates at December 31, 20122013. As of December 31, 20122013, we had a borrowing capacity of $697.8$893.9 million on our $850.0 million$1.0 billion Revolving Credit Facility (including outstanding letters of credit), and we had net available capacity under the European LOC Facility of €61.9 million ($81.7 million). Our Revolving Credit Facility and our European LOC Facility areis committed and are held by a diversified group of financial institutions. In the third quarter of 2013 we elected not to renew our European LOC facility. At December 31, 20122013 and 2011,2012, as a result of increases in values of the plan’s assets and our contributions to the plan, our U.S. pension plan was fully-funded as defined by applicable law. After consideration of our intent to maintain fully funded status, we contributed $7.9$20.0 million to our U.S. pension plan in 2012,2013, excluding direct benefits paid.paid of $4.2 million. We continue to maintain an asset allocation consistent with our strategy to maximize total return, while reducing portfolio risks through asset class diversification. At December 31, 2012,2013, $299.4334.0 million of our total cash balance of $304.3363.8 million was held by foreign subsidiaries, $248.7257.7 million of which we consider permanently reinvested outside the U.S. Based on the expected 2013 liquidity needs of our various geographies, 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 $248.7257.7 million could be repatriated without resulting in a material U.S. cash tax liability.liability between $5 million and $15 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.
OUTLOOK FOR 20132014 Our future results of operations and other forward-looking statements contained in this Annual Report, including this MD&A, involve a number of risks and uncertainties — in particular, the statements regarding our goals and strategies, new product introductions, plans to cultivate new businesses, future economic conditions, revenue, pricing, gross profit margin and costs, capital spending, depreciation and amortization, research and development expenses, potential impairment of investments, tax rate and pending tax and legal proceedings. Our future results of operations may also be affected by the amount, type and valuation of share-based awards granted, as well as the amount of awards forfeited due to employee turnover. In addition to the various important
factors discussed above, a number of other factors could cause actual results to differ materially from our expectations. See the risks described in "Item 1A. Risk Factors" of this Annual Report. Our bookings were $4,713.54,881.4 million during 20122013. Because a booking represents a contract that can be, in certain circumstances, modified or canceled, and can include varying lengths between the time of booking and the time of revenue recognition, there is no guarantee that the increase in bookings will result in a comparable increase in revenues or otherwise be indicative of future results. We expect a continued competitive economic environment in 2013;2014; however, we anticipate benefits from the continuation of our end userend-user strategy, the strength of our high margin aftermarket business, continued disciplined cost management, our diverse customer base, our broad product portfolio and our unified operating platform. Similar to prior years, we expect our results will be weighted towards the second half of the year. While we believe that our primary markets continue to provide opportunities, as evidenced by eight consecutive quarters of over $1 billion in bookings, we remain cautious in our outlook for 20132014 given the continuing uncertainty of global economic conditions. For additional discussion on our markets and our opportunities, see the "Business Overview — Our Markets" section of this MD&A. On December 31, 20122013, we had $498.1$796.9 million of fixed-rate Senior Notes outstanding and $395.0$370.0 million of variable-rate debt under our Senior Credit Facility. All of our borrowings under our Senior Credit Facility carry a floating rate of interest. As of December 31, 2012,2013, we had $275.0$140.0 million of derivative contracts to convert a portion of floatingvariable interest rates to fixed interest rates to reduce our exposure to interest rate volatility. However, because a portion of our debt carries a floatingvariable rate of interest, our debt is subject to volatility in rates, which could impact interest expense. We expect our interest expense in 20132014 will be higher than 20122013 due to our increased level of debt. Our results of operations may also be impacted by unfavorable foreign currency exchange rate movements. See “Item 7A. Quantitative and Qualitative Disclosures about Market Risk” of this Annual Report. We expect to generate sufficient cash from operations to fund our working capital, capital expenditures, dividend payments, share repurchases, debt payments and pension plan contributions in 20132014. The amount of cash generated or consumed by working
capital is dependent on our level of revenues, customer cash advances, backlog, customer-driven delays and other factors. We seek to improve our working capital utilization, with a particular focus on improving the management of accounts receivable and inventory. In 2013,2014, our cash flows for investing activities will be focused on strategic initiatives to pursue new markets, geographic expansion, information technology infrastructure and cost reduction opportunities and are expectedwe expect capital expenditures to be between $120130 million and $130140 million, before consideration of any potential acquisition activity. We have $25.040.0 million in scheduled principal repayments in 20132014 under our Senior Credit Facility, and we expect to comply with the covenants under our Senior Credit Facility in 20132014. See Note 10 to our consolidated financial statements included in Item 8 of this Annual Report for further discussion of our debt covenants. We currently anticipate that our minimum contribution to our qualified U.S. pension plan will be approximately $20 million, excluding direct benefits paid, in 20132014 in order to maintain fully-funded status as defined by applicable law. We currently anticipate that our contributions to our non-U.S. pension plans will be approximately $1013 million in 20132014., excluding direct benefits paid. On February 8, 2013, the Venezuelan government announced its intention to devalue its currency (bolivar) from 4.3 to 6.3 bolivars to the U.S. dollar. Our operations in Venezuela generally consist of a service center that performs service and repair activities. 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. Our Venezuelan subsidiary's sales in 2012 and total assets at December 31, 2012 represented less than 1% of consolidated sales and total assets for the same period. Our preliminary assessment of the impact of the devaluation is that we will incur an after-tax charge of approximately $3 million in the first quarter of 2013 as a result of re-measuring using the rate of 6.3 bolivars to the U.S. dollar. We are currently assessing the ongoing impact of the currency devaluation on our Venezuelan operations and imports into the market, including further actions of the Venezuelan government and economic conditions in Venezuela, such as inflation and capital spending.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS The following table presents a summary of our contractual obligations at December 31, 20122013: | | | Payments Due By Period | Payments Due By Period | | Within 1 Year | | 1-3 Years | | 3-5 Years | | Beyond 5 Years | | Total | Within 1 Year | | 1-3 Years | | 3-5 Years | | Beyond 5 Years | | Total | | (Amounts in millions) | (Amounts in millions) | Term Loan Facility and Senior Notes | $ | 25.0 |
| | $ | 85.0 |
| | $ | 285.0 |
| | $ | 500.0 |
| | $ | 895.0 |
| $ | 40.0 |
| | $ | 105.0 |
| | $ | 225.0 |
| | $ | 796.9 |
| | $ | 1,166.9 |
| Fixed interest payments(1) | 18.9 |
| | 35.3 |
| | 35.0 |
| | 87.5 |
| | 176.7 |
| 29.9 |
| | 59.0 |
| | 59.0 |
| | 123.4 |
| | 271.3 |
| Variable interest payments(2) | 7.1 |
| | 12.3 |
| | 7.3 |
| | — |
| | 26.7 |
| 5.4 |
| | 8.8 |
| | 4.8 |
| | — |
| | 19.0 |
| Other debt and capital lease obligations | 34.5 |
| | 1.0 |
| | — |
| | — |
| | 35.5 |
| 32.7 |
| | 0.7 |
| | — |
| | — |
| | 33.4 |
| Operating leases | 52.8 |
| | 73.2 |
| | 39.0 |
| | 47.1 |
| | 212.1 |
| 54.1 |
| | 75.5 |
| | 45.6 |
| | 47.0 |
| | 222.2 |
| Purchase obligations:(3) | | | | | | | | | |
| | | | | | | | | |
| Inventory | 553.9 |
| | 13.3 |
| | 1.7 |
| | 0.8 |
| | 569.7 |
| 503.9 |
| | 10.0 |
| | 2.5 |
| | 0.1 |
| | 516.5 |
| Non-inventory | 39.5 |
| | 3.1 |
| | 0.1 |
| | — |
| | 42.7 |
| 44.1 |
| | 0.7 |
| | — |
| | — |
| | 44.8 |
| Pension and postretirement benefits(4) | 53.2 |
| | 109.5 |
| | 115.8 |
| | 315.6 |
| | 594.1 |
| 55.4 |
| | 112.6 |
| | 121.1 |
| | 322.6 |
| | 611.7 |
| Total | $ | 784.9 |
| | $ | 332.7 |
| | $ | 483.9 |
| | $ | 951.0 |
| | $ | 2,552.5 |
| $ | 765.5 |
| | $ | 372.3 |
| | $ | 458.0 |
| | $ | 1,290.0 |
| | $ | 2,885.8 |
|
| | (1) | Fixed interest payments represent net incremental payments under interest rate swap agreements related to the Term Loan Facility and interest payments on the Senior Notes.Notes and Term Loan Facility as defined in Note 10 to our consolidated financial statements included in Item 8 of this Annual Report. |
| | (2) | Variable interest payments under our Senior CreditTerm Loan Facility were estimated using a base rate of three-month LIBOR as of December 31, 20122013. |
| | (3) | Purchase obligations are presented at the face value of the purchase order, excluding the effects of early termination provisions. Actual payments could be less than amounts presented herein. |
| | (4) | Retirement and postretirement benefits represent estimated benefit payments for our U.S. and non-U.S. defined benefit plans and our postretirement medical plans, as more fully described below and in Note 12 to our consolidated financial statements included in Item 8 of this Annual Report. |
As of December 31, 20122013, the gross liability for uncertain tax positions was $59.159.3 million. We do not expect a material payment related to these obligations to be made within the next twelve months. We are unable to provide a reasonably reliable estimate of the timing of future payments relating to the uncertain tax positions.
The following table presents a summary of our commercial commitments at December 31, 20122013: | | | Commitment Expiration By Period | Commitment Expiration By Period | | Within 1 Year | | 1-3 Years | | 3-5 Years | | Beyond 5 Years | | Total | Within 1 Year | | 1-3 Years | | 3-5 Years | | Beyond 5 Years | | Total | | (Amounts in millions) | (Amounts in millions) | Letters of credit | $ | 448.3 |
| | $ | 150.8 |
| | $ | 23.6 |
| | $ | 53.0 |
| | $ | 675.7 |
| $ | 484.2 |
| | $ | 167.2 |
| | $ | 40.0 |
| | $ | 11.8 |
| | $ | 703.2 |
| Surety bonds | 105.3 |
| | 22.5 |
| | — |
| | — |
| | 127.8 |
| 68.5 |
| | 25.4 |
| | — |
| | — |
| | 93.9 |
| Total | $ | 553.6 |
| | $ | 173.3 |
| | $ | 23.6 |
| | $ | 53.0 |
| | $ | 803.5 |
| $ | 552.7 |
| | $ | 192.6 |
| | $ | 40.0 |
| | $ | 11.8 |
| | $ | 797.1 |
|
We expect to satisfy these commitments through performance under our contracts.
PENSION AND POSTRETIREMENT BENEFITS OBLIGATIONS Plan Descriptions We and certain of our subsidiaries have defined benefit pension plans and defined contribution plans for full-time and part-time employees. Approximately 69%68% of total defined benefit pension plan assets and approximately 55%53% of defined benefit pension obligations are related to the U.S. qualified plan as of December 31, 20122013. The assets for the U.S. qualified plan are held in a single trust with a common asset allocation. Unless specified otherwise, the references in this section are to all of our U.S. and non-U.S. plans. None of our common stock is directly held by these plans.
Our U.S. defined benefit plan assets consist of a balanced portfolio of primarily U.S. equity and fixed income securities. Our non-U.S. defined benefit plan assets include a significant concentration of United Kingdom ("U.K.") equity and fixed income securities. In addition, certain of our defined benefit plans hold investments in European equity and fixed income securities as discussed in Note 12 to our consolidated financial statements included in Item 8 of this Annual Report. We monitor investment allocations and manage plan assets to maintain acceptable levels of risk. Benefits under our defined benefit pension plans are based primarily on participants’ compensation and years of credited service. Assets under our defined benefit pension plans consist primarily of equity and fixed-income securities. At December 31, 20122013, the estimated fair market value of U.S. and non-U.S. plan assets for our defined benefit pension plans increased to $553.4605.5 million from $495.1553.4 million at December 31, 20112012. Assets were allocated as follows:
| | | | U.S. Plan | | U.S. Plan | Asset category | | 2012 | | 2011 | | 2013 | | 2012 | U.S. Large Cap | | 28 | % | | 28 | % | | 20 | % | | 28 | % | U.S. Small Cap | | 4 | % | | 4 | % | | 4 | % | | 4 | % | International Large Cap | | 14 | % | | 14 | % | | 14 | % | | 14 | % | Emerging Markets | | 4 | % | | 4 | % | | 5 | % | | 4 | % | World Equity | | | 8 | % | | 0 | % | Equity securities | | 50 | % | | 50 | % | | 51 | % | | 50 | % | Liability Driven Investment | | | 39 | % | | 0 | % | Long-Term Government/Credit | | 21 | % | | 21 | % | | 10 | % | | 21 | % | Intermediate Bond | | 29 | % | | 29 | % | | 0 | % | | 29 | % | Fixed income | | 50 | % | | 50 | % | | 49 | % | | 50 | % | Other(1) | | 0 | % | | 0 | % | | 0 | % | | 0 | % |
| | (1) | Less than 1% of holdings are in Other category in 2011.2013. |
| | | | Non-U.S. Plans | | Non-U.S. Plans | Asset category | | 2012 | | 2011 | | 2013 | | 2012 | North American Companies | | 5 | % | | 5 | % | | 3 | % | | 5 | % | U.K. Companies | | 19 | % | | 20 | % | | 10 | % | | 19 | % | European Companies | | 6 | % | | 6 | % | | 4 | % | | 6 | % | Asian Pacific Companies | | 5 | % | | 5 | % | | 3 | % | | 5 | % | Global Equity | | 1 | % | | 1 | % | | 8 | % | | 1 | % | Equity securities | | 36 | % | | 37 | % | | 28 | % | | 36 | % | U.K. Government Gilt Index | | 21 | % | | 21 | % | | 28 | % | | 21 | % | U.K. Corporate Bond Index | | 19 | % | | 17 | % | | 21 | % | | 19 | % | Global Fixed Income Bond | | 22 | % | | 23 | % | | 20 | % | | 22 | % | Fixed income | | 62 | % | | 61 | % | | 69 | % | | 62 | % | Other | | 2 | % | | 2 | % | | 3 | % | | 2 | % |
The projected benefit obligation ("Benefit Obligation") for our defined benefit pension plans was $763.9769.2 million and $658.8763.9 million as of December 31, 20122013 and 20112012, respectively. The estimated prior service cost and the estimated actuarial net loss for the defined benefit pension plans that will be amortized from accumulated other comprehensive loss into net pension expense in 20132014 is less than $0.10.5 million and $20.415.1 million, respectively. We amortize estimated prior service costs and estimated net losses over the remaining expected service period or over the remaining expected lifetime for plans with only inactive participants. We sponsor defined benefit postretirement medical plans covering certain current retirees and a limited number of future retirees in the U.S. These plans provide for medical and dental benefits and are administered through insurance companies. We fund the plans as benefits are paid, such that the plans hold no assets in any period presented. Accordingly, we have no investment
strategy or targeted allocations for plan assets. The benefits under the plans are not available to new employees or most existing employees. The Benefit Obligation for our defined benefit postretirement medical plans was $31.5 million and $35.0 million at bothas of December 31, 20122013 and 20112012., respectively. The estimated actuarial net gain for the defined benefit postretirement medical plans that will be amortized from accumulated other comprehensive loss into net pension expense in 20132014 is $1.21.4 million. No estimated prior service benefit or cost is expected to be amortized from accumulated other comprehensive loss into U.S. pension expense in 2013.2014. We amortize any estimated prior service benefits and estimated net gain over the remaining expected service period of approximately three years. Accrual Accounting and Significant Assumptions We account for pension benefits using the accrual method, recognizing pension expense before the payment of benefits to retirees. The accrual method of accounting for pension benefits requires actuarial assumptions concerning future events that will determine the amount and timing of the benefit payments. Our key assumptions used in calculating our cost of pension benefits are the discount rate, the rate of compensation increase and the expected long-term rate of return on plan assets. We, in consultation with our actuaries, evaluate the key actuarial assumptions and other assumptions used in calculating the cost of pension and postretirement benefits, such as discount rates, expected return on plan assets for funded plans, mortality rates, retirement rates and assumed rate of compensation increases, and determine such assumptions as of December 31 of each year to calculate liability information as of that date and pension and postretirement expense for the following year. See discussion of our accounting for and assumptions related to pension and postretirement benefits in the “Our Critical Accounting Estimates” section of this MD&A. In 20122013, net pension expense for our defined benefit pension plans included in operating income was $41.450.5 million compared with$41.4 million in 2012 and $37.8 million in 2011 and $36.1 million in 2010. The gain for the postretirement medical plans was $0.1 million in 2012 compared with $1.2 million in 2011 and $2.4 million in 2010.
The following are assumptions related to our defined benefit pension plans as of December 31, 20122013: | | | U.S. Plan | | Non-U.S. Plans | U.S. Plan | | Non-U.S. Plans | Weighted average assumptions used to determine Benefit Obligation: | |
| | |
| |
| | |
| Discount rate | 3.75 | % | | 4.16 | % | 4.50 | % | | 4.22 | % | Rate of increase in compensation levels | 4.25 |
| | 3.84 |
| 4.25 |
| | 3.83 |
| Weighted average assumptions used to determine 2012 net pension expense: | | | | | Weighted average assumptions used to determine 2013 net pension expense: | | | | | Long-term rate of return on assets | 6.25 | % | | 5.78 | % | 6.00 | % | | 5.49 | % | Discount rate | 4.50 |
| | 5.09 |
| 3.75 |
| | 4.16 |
| Rate of increase in compensation levels | 4.25 |
| | 3.56 |
| 4.25 |
| | 3.84 |
|
The following provides a sensitivity analysis of alternative assumptions on the U.S. qualified and aggregate non-U.S. pension plans and U.S. postretirement plans. Effect of Discount Rate Changes and Constancy of Other Assumptions: | | | 0.5% Increase | | 0.5% Decrease | 0.5% Increase | | 0.5% Decrease | | (Amounts in millions) | (Amounts in millions) | U.S. defined benefit pension plan: | |
| | |
| |
| | |
| Effect on net pension expense | $ | (1.0 | ) | | $ | 1.1 |
| $ | (1.1 | ) | | $ | 1.2 |
| Effect on Benefit Obligation | (14.4 | ) | | 15.6 |
| (16.2 | ) | | 17.5 |
| Non-U.S. defined benefit pension plans: | | | | | | | Effect on net pension expense | (1.6 | ) | | 1.7 |
| (2.5 | ) | | 2.7 |
| Effect on Benefit Obligation | (24.5 | ) | | 27.2 |
| (27.0 | ) | | 30.7 |
| U.S. Postretirement medical plans: | | | | | | | Effect on postretirement medical expense | (0.2 | ) | | 0.2 |
| (0.2 | ) | | 0.1 |
| Effect on Benefit Obligation | (1.1 | ) | | 1.2 |
| (1.1 | ) | | 1.1 |
|
Effect of Changes in the Expected Return on Assets and Constancy of Other Assumptions: | | | 0.5% Increase | | 0.5% Decrease | 0.5% Increase | | 0.5% Decrease | | (Amounts in millions) | (Amounts in millions) | U.S. defined benefit pension plan: | |
| | |
| |
| | |
| Effect on net pension expense | $ | (1.7 | ) | | $ | 1.7 |
| $ | (1.7 | ) | | $ | 1.7 |
| Non-U.S. defined benefit pension plans: | |
| | |
| |
| | |
| Effect on net pension expense | (0.7 | ) | | 0.7 |
| (0.8 | ) | | 0.8 |
|
As discussed below, accounting principles generally accepted in the U.S. (“U.S. GAAP”) provide that differences between expected and actual returns are recognized over the average future service of employees. At December 31, 20122013, as compared towith December 31, 20112012, we decreasedincreased our discount rate for the U.S. plan from 4.50%3.75% to 3.75%4.50% based on an analysis of publicly-traded investment grade U.S. corporate bonds, which had a lowerhigher yield due to current market conditions. We decreased ourThe average discount rate for the non-U.S. plans increased slightly from 5.09%4.16% to 4.16%4.22% based primarily on lower applicable corporate AA-graded bond yields forrates remaining steady in the Euro zoneEurozone, U.K. and the U.K.Venezuela while all other non-U.S. countries discount rates increased. The average assumed rate of compensation remained constant at 4.25% for the U.S. plan and increaseddecreased slightly from 3.56%3.84% to 3.84%3.83% for our non-U.S. plans. To determine the 20122013 pension expense, the expected rate of return on U.S. plan assets remained consistent with 2011 atdecreased from 6.25% to 6.25%6.00% and we decreased our average rate of return on non-U.S. plan assets from 6.13%5.78% to 5.78%5.49%, primarily as a result of the decrease in the U.K. rate of return on assets.our target asset allocations and expected long-term asset returns. As the expected rate of return on plan assets is long-term in nature, short-term market changes do not significantly impact the rates.rate. We expect that the net pension expense for our defined benefit pension plans included in earnings before income taxes will be approximately $106 million higherlower in 20132014 than the $41.450.5 million in 20122013, reflecting, among other things, increasedprimarily due to the reduction in the amortization of the actuarial net loss and increased service costs. We expect the 2013 net pension benefit for the postretirement medical plans to be $0.1 million higher than the $0.1 million benefit in 2012.
loss. We have used discount rates of 3.75%4.50%, 4.16%4.22% and 3.25%4.00% at December 31, 20122013, in calculating our estimated 20132014 net pension expense for U.S. pension plans, non-U.S. pension plans and other postretirement plans, respectively. The assumed ranges for the annual rates of increase in health care costs were 7.5% for 2013, 8.0% for 2012, and 8.5% for 2011 and 9.0% for 2010, with a gradual decrease to 5.0% for 2032 and future years. If actual costs are higher than those assumed, this will likely put modest upward pressure on our expense for retiree health care. Plan Funding Our funding policy for defined benefit plans is to contribute at least the amounts required under applicable laws and local customs. WeIncluding direct benefits, we contributed$46.9 million, $28.1 million $27.0 million and $50.227.0 million to our defined benefit plans in 20122013, 20112012 and 20102011, respectively. After consideration of our intent to remain fully-funded based on standards set by law, we currently anticipate that our contribution to our U.S. pension plan in 20132014 will be approximately $20 million, excluding direct benefits paid. We expect to contribute approximately $1013 million to our non-U.S. pension plans in 20132014., excluding direct benefits paid. For further discussion of our pension and postretirement benefits, see Note 12 to our consolidated financial statements included in Item 8 of this Annual Report.
OUR CRITICAL ACCOUNTING ESTIMATES The process of preparing financial statements in conformity with U.S. GAAP requires the use of estimates and assumptions to determine reported amounts of certain assets, liabilities, revenues and expenses and the disclosure of related contingent assets and liabilities. These estimates and assumptions are based upon information available at the time of the estimates or assumptions, including our historical experience, where relevant. The most significant estimates made by management include: timing and amount of revenue recognition; deferred taxes, tax valuation allowances and tax reserves; reserves for contingent losses; pension and postretirement benefits; and valuation of goodwill, indefinite-lived intangible assets and other long-lived assets. The significant estimates are reviewed quarterly by management. Because of the uncertainty of factors surrounding the estimates, assumptions and judgments used in the preparation of our financial statements, actual results may differ from the estimates, and the difference may be material. Our critical accounting policies are those policies that are both most important to our financial condition and results of operations and require the most difficult, subjective or complex judgments on the part of management in their application, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. We believe that the following represent our critical accounting policies. For a summary of all of our significant accounting policies, see Note 1 to our consolidated financial statements included in Item 8 of this Annual Report. Management and our external auditors have discussed our critical accounting estimates and policies with the Audit Committee of our Board of Directors.
Revenue Recognition Revenues for product sales are recognized when the risks and rewards of ownership are transferred to the customers, which is typically based on the contractual delivery terms agreed to with the customer and fulfillment of all but inconsequential or perfunctory actions. In addition, our policy requires persuasive evidence of an arrangement, a fixed or determinable sales price and reasonable assurance of collectability. We defer the recognition of revenue when advance payments are received from customers before performance obligations have been completed and/or services have been performed. Freight charges billed to customers are included in sales and the related shipping costs are included in cost of sales in our consolidated statements of income. Our contracts typically include cancellation provisions that require customers to reimburse us for costs incurred up to the date of cancellation, as well as any contractual cancellation penalties. We enter into certain contractsagreements with multiple deliverables that may include any combination of designing, developing, manufacturing, modifying, installing and commissioning of flow management equipment and providing services related to the performance of such products. Delivery of these products and services typically occurs within a one to two-year period, although many arrangements, such as "book and ship""short-cycle" type orders, have a shorter timeframe for delivery. We aggregate or separate deliverables into units of accounting based on whether the deliverable(s) have standalone value to the customer and when no(impact of general rightrights of return exists.is immaterial). Contract value is allocated ratably to the units of accounting in the arrangement based on their relative selling prices determined as if the deliverables were sold separately.
Revenues for long-term contracts that exceed certain internal thresholds regarding the size and duration of the project and provide for the receipt of progress billings from the customer are recorded on the percentage of completion method with progress measured on a cost-to-cost basis. Percentage of completion revenue represents less than 9%7% of our consolidated sales for each year presented.
Revenue on service and repair contracts is recognized after services have been agreed to by the customer and rendered. Revenues generated under fixed fee service and repair contracts are recognized on a ratable basis over the term of the contract. These contracts can range in duration, but generally extend for up to five years. Fixed fee service contracts represent aproximatelyapproximately 1% of consolidated sales for each year presented. In certain instances, we provide guaranteed completion dates under the terms of our contracts. Failure to meet contractual delivery dates can result in late delivery penalties or non-recoverable costs. In instances where the payment of such costs are deemed to be probable, we perform a project profitability analysis, accounting for such costs as a reduction of realizable revenues, which could potentially cause estimated total project costs to exceed projected total revenues realized from the project. In such instances, we would record reserves to cover such excesses in the period they are determined. In circumstances where the total projected revenues still exceed total projected costs, the incurrence of penalties or non-recoverable costs generally reduces profitability of the project at the time of subsequent revenue recognition. Our reported results would change if different estimates were used for contract costs or if different estimates were used for contractual contingencies. Deferred Taxes, Tax Valuation Allowances and Tax Reserves We recognize valuation allowances to reduce the carrying value of deferred tax assets to amounts that we expect are more likely than not to be realized. Our valuation allowances primarily relate to the deferred tax assets established for certain tax credit carryforwards and net operating loss carryforwards for non-U.S. subsidiaries, and we evaluate the realizability of our deferred tax assets by assessing the related valuation allowance and by adjusting the amount of these allowances, if necessary. We assess such factors as our forecast of future taxable income and available tax planning strategies that could be implemented to realize the net deferred tax assets in determining the sufficiency of our valuation allowances. Failure to achieve forecasted taxable income in the applicable tax jurisdictions could affect the ultimate realization of deferred tax assets and could result in an increase in our effective tax rate on future earnings. Implementation of different tax structures in certain jurisdictions could, if successful, result in future reductions of certain valuation allowances. The amount of income taxes we pay is subject to ongoing audits by federal, state and foreign tax authorities, which often result in proposed assessments. Significant judgment is required in determining income tax provisions and evaluating tax positions. We establish reserves for open tax years for uncertain tax positions that may be subject to challenge by various tax authorities. The consolidated tax provision and related accruals include the impact of such reasonably estimable losses and related interest and penalties as deemed appropriate. Tax benefits recognized in the financial statements from uncertain tax positions are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. While we believe we have adequately provided for any reasonably foreseeable outcome related to these matters, our future results may include favorable or unfavorable adjustments to our estimated tax liabilities. To the extent that the expected tax outcome of these matters changes, such changes in estimate will impact the income tax provision in the period in which such determination is made.
Reserves for Contingent Loss Liabilities are recorded for various contingencies arising in the normal course of business when it is both probable that a loss has been incurred and such loss is estimable. Assessments of reserves are based on information obtained from our independent and in-house experts, including recent legal decisions and loss experience in similar situations. The recorded legal reserves are susceptible to changes due to new developments regarding the facts and circumstances of each matter, changes in political environments, legal venue and other factors. Recorded environmental reserves could change based on further analysis of our properties, technological innovation and regulatory environment changes. Estimates of liabilities for unsettled asbestos-related claims are based on known claims and on our experience during the preceding two years for claims filed, settled and dismissed, with adjustments for events deemed unusual and unlikely to recur. A substantial majority of our asbestos-related claims are covered by insurance or indemnities. Estimated indemnities and receivables from insurance carriers for unsettled claims and receivables for settlements and legal fees paid by us for asbestos-related claims are estimated using our historical experience with insurance recovery rates and estimates of future recoveries, which include estimates of coverage and financial viability of our insurance carriers. We have claims pending against certain insurers that, if resolved more favorably than estimated future recoveries, 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 existing indemnities and insurance coverage. Changes in claims filed, settled and dismissed and differences between actual and estimated settlement costs and insurance or indemnity recoveries could impact future expense.
Pension and Postretirement Benefits We provide pension and postretirement benefits to certain of our employees, including former employees, and their beneficiaries. The assets, liabilities and expenses we recognize and disclosures we make about plan actuarial and financial information are dependent on the assumptions and estimates used in calculating such amounts. The assumptions include factors such as discount rates, health care cost trend rates, inflation, expected rates of return on plan assets, retirement rates, mortality rates, turnover, rates of compensation increases and other factors. The assumptions utilized to compute expense and benefit obligations are shown in Note 12 to our consolidated financial statements included in Item 8 of this Annual Report. These assumptions are assessed annually in consultation with independent actuaries and investment advisors as of December 31 and adjustments are made as needed. We evaluate prevailing market conditions and local laws and requirements in countries where plans are maintained, including appropriate rates of return, interest rates and medical inflation (health care cost trend) rates. We ensure that our significant assumptions are within the reasonable range relative to market data. The methodology to set our significant assumptions includes: Discount rates are estimated using high quality debt securities based on corporate or government bond yields with a duration matching the expected benefit payments. For the U.S. the discount rate is obtained from an analysis of publicly-traded investment-grade corporate bonds to establish a weighted average discount rate. For plans in the United Kingdom and the Euro zoneEurozone we use the discount rate obtained from an analysis of AA-graded corporate bonds used to generate a yield curve. For other countries or regions without a corporate AA bond market, government bond rates are used. Our discount rate assumptions are impacted by changes in general economic and market conditions that affect interest rates on long-term high-quality debt securities, as well as the duration of our plans’ liabilities. The expected rates of return on plan assets are derived from reviews of asset allocation strategies, expected long-term performance of asset classes, risks and other factors adjusted for our specific investment strategy. These rates are impacted by changes in general market conditions, but because they are long-term in nature, short-term market changes do not significantly impact the rates. Changes to our target asset allocation also impact these rates. The expected rates of compensation increase reflect estimates of the change in future compensation levels due to general price levels, seniority, age and other factors. Depending on the assumptions used, the pension and postretirement expense could vary within a range of outcomes and have a material effect on reported earnings. In addition, the assumptions can materially affect benefit obligations and future cash funding. Actual results in any given year may differ from those estimated because of economic and other factors. We evaluate the funded status of each retirement plan using current assumptions and determine the appropriate funding level considering applicable regulatory requirements, tax deductibility, reporting considerations, cash flow requirements and other factors. We discuss our funding assumptions with the Finance Committee of our Board of Directors.
Valuation of Goodwill, Indefinite-Lived Intangible Assets and Other Long-Lived Assets The initial recording of goodwill and intangible assets requires subjective judgments concerning estimates of the fair value of the acquired assets. We test the value of goodwill and indefinite-lived intangible assets for impairment as of December 31 each year or whenever events or circumstances indicate such assets may be impaired. The test for goodwill impairment involves significant judgment in estimating projections of fair value generated through future performance of each of the reporting units. The identification of our reporting units began at the operating segment level and considered whether components one level below the operating segment levels should be identified as reporting units for purpose of testing goodwill for impairment based on certain conditions. These conditions included, among other factors, (i) the extent to which a component represents a business and (ii) the aggregation of economically similar components within the operating segments and resulted in eight reporting units. Other factors that were considered in determining whether the aggregation of components was appropriate included the similarity of the nature of the products and services, the nature of the production processes, the methods of distribution and the types of industries served. Impairment lossesAn impairment loss for goodwill areis recognized wheneverif the implied fair value of goodwill is less than the carrying value. We estimate the fair value of our reporting units based on an income approach, whereby we calculate the fair value of a reporting unit based on the present value of estimated future cash flows. A discounted cash flow analysis requires us to make various judgmental assumptions about future sales, operating margins, growth rates and discount rates, which are based on our budgets, business plans, economic projections, anticipated future cash flows and market participants. Assumptions are also made for varying perpetual growth rates for periods beyond the long-term business plan period. We did not record an impairment of goodwill in 20122013, 20112012 or 20102011. The fair values of our reporting units substantially exceeded their carrying values at December 31, 2012.2013.
We also consider our market capitalization in our evaluation of the fair value of our goodwill. Our market capitalization increased as compared with 20112012 and did not indicate a potential impairment of our goodwill as of December 31, 20122013. Impairment losses for indefinite-lived intangible assets are recognized whenever the estimated fair value is less than the carrying value. Fair values are calculated for trademarks using a "relief from royalty" method, which estimates the fair value of the trademarksa trademark by determining the present value of estimated royalty payments that are avoided as a result of owning the trademark. This method includes judgmental assumptions about sales growth and discount rates that have a significant impact on the fair value and are substantially consistent with the assumptions used to determine the fair value of our reporting units discussed above. We did not record a material impairment of our trademarks in20122013, 20112012 or 20102011. The net realizablerecoverable value of other long-lived assets, including property, plant and equipment and finite-lived intangible assets, is reviewed when indicators of potential impairments are present. The net realizablerecoverable value is based upon an assessment of the estimated future cash flows related to those assets, utilizing a methodologyassumptions similar to thatthose for goodwill. Additional considerations related to our long-lived assets include expected maintenance and improvements, changes in expected uses and ongoing operating performance and utilization.
Due to uncertain market conditions and potential changes in strategy and product portfolio, it is possible that forecasts used to support asset carrying values may change in the future, which could result in non-cash charges that would adversely affect our financial condition and results of operations.
ACCOUNTING DEVELOPMENTS We have presented the information about accounting pronouncements not yet implemented in Note 1 to our consolidated financial statements included in Item 8 of this Annual Report.
| | ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We have market risk exposure arising from changes in interest rates and foreign currency exchange rate movements. We are exposed to credit-related losses in the event of non-performance by counterparties to financial instruments, including interest rate swaps and forward exchange contracts, but we currently expect all counterparties will continue to meet their obligations given their current creditworthiness. Interest Rate Risk Our earnings are impacted by changes in short-term interest rates as a result of borrowings under our Senior Credit Facility, which bear interest based on floating rates. At December 31, 20122013, after the effect of interest rate swaps, we had $120.0230.0 million of variable rate debt obligations outstanding under our Senior Credit Facility with a weighted average interest rate of 1.81%1.50%. A hypothetical change of 100 basis points in the interest rate for these borrowings, assuming constant variable rate debt levels, would have changed interest expense by $1.22.3 million for the year ended December 31, 20122013. At December 31, 20122013 and 20112012, we had
$275.0140.0 million and $330.0275.0 million, respectively, of notional amount in outstanding interest rate swaps with third parties with varying maturities through June 2015. Foreign Currency Exchange Rate Risk A substantial portion of our operations are conducted by our subsidiaries outside of the U.S. in currencies other than the U.S. dollar. The primary currencies in which we operate, in addition to the U.S. dollar, are the Argentine peso, Australian dollar, Brazilian real, British pound, Canadian dollar, Chinese yuan, Colombian peso, Euro, Indian rupee, Japanese yen, Mexican peso, Singapore dollar, Swedish krona and Venezuelan bolivar. Almost all of our non-U.S. subsidiaries conduct their business primarily in their local currencies, which are also their functional currencies. Foreign currency exposures arise from translation of foreign-denominated assets and liabilities into U.S. dollars and from transactions, including firm commitments and anticipated transactions, denominated in a currency other than a non-U.S. subsidiary’s functional currency. Generally, we view our investments in foreign subsidiaries from a long-term perspective and, therefore, do not hedge these investments. We use capital structuring techniques to manage our investment in foreign subsidiaries as deemed necessary. We realized net (losses) gains (losses) associated with foreign currency translation of $18.2(28.9) million, $(56.8)18.2 million and $(10.6)(56.8) million for the years ended December 31, 20122013, 20112012 and 20102011, respectively, which are included in other comprehensive lossincome (loss). We employ a foreign currency risk management strategy to minimize potential changes in cash flows from unfavorable foreign currency exchange rate movements. Where available, the use of forward exchange contracts allows us to mitigate transactional exposure to exchange rate fluctuations as the gains or losses incurred on the forward exchange contracts will offset, in whole or in part, losses or gains on the underlying foreign currency exposure. Our policy allows foreign currency coverage only for identifiable foreign currency exposures, and changesbeginning in the fair valuesfourth quarter of these2013 instruments that meet certain criteria are included in other (expense)
income, net in the accompanying consolidated statements of income.designated for hedge accounting. As of December 31, 20122013, we had a U.S. dollar equivalent of $608.9$616.9 million in aggregate notional amount outstanding in forward exchange contracts with third parties, compared with $481.2$608.9 million million at December 31, 20112012. Transactional currency gains and losses arising from transactions outside of our sites’ functional currencies and changes in fair value of certainnon-designated forward exchange contracts are included in our consolidated results of operations. We recognized foreign currency net (losses) gains of $(21.3)(12.6) million, $3.7(21.3) million and $(26.5)3.7 million for the years ended December 31, 20122013, 20112012 and 20102011, respectively, which are included in ootherther (expense) income, net in the accompanying consolidated statements of income. See discussion of the impact in 2013 of the devaluation of the Venezuelan bolivar in Note 1 to our consolidated financial statements included in Item 8 of this Annual Report.
Based on a sensitivity analysis at December 31, 20122013, a 10% change in the foreign currency exchange rates for the year ended December 31, 20122013 would have impacted our net earnings by approximately $2933 million, due primarily to the Euro. This calculation assumes that all currencies change in the same direction and proportion relative to the U.S. dollar and that there are no indirect effects, such as changes in non-U.S. dollar sales volumes or prices. This calculation does not take into account the impact of the foreign currency forward exchange contracts discussed above. Hedging related transactions which are related tofor interest rate swaps and designated forward exchange contracts recorded to other comprehensive lossincome (loss), net of deferred taxes, are summarized below:in Note 18 to our consolidated financial statements included in Item 8 of this Annual Report. | | | | | | | | | | | | | | Year Ended December 31, | | 2012 | | 2011 | | 2010 | | (Amounts in thousands) | Loss reclassified from accumulated other comprehensive loss into income for settlements, net of tax | $ | (923 | ) | | $ | (1,492 | ) | | $ | (4,215 | ) | Loss recognized in other comprehensive loss, net of tax | (442 | ) | | (1,799 | ) | | (1,392 | ) | Cash flow hedging activity, net of tax | $ | 481 |
| | $ | (307 | ) | | $ | 2,823 |
|
We expect to recognize losses of $1.0$0.3 million,, $0.5 million and $0.2 million, net of deferred taxes, into earnings in 20132014,2014 and 2015, respectively, related to interest rate swap agreements based on their fair values at December 31, 20122013.
| | ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To The Board of Directors and Shareholders of Flowserve Corporation:
In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of Flowserve Corporation and its subsidiaries at December 31, 20122013 and 2011,2012, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 20122013 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012,2013, based on criteria established in Internal Control - Integrated Framework (1992)issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management'sManagement’s Report on Internal Control Overover Financial Reporting appearing under Item 9A.Reporting. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company'scompany’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company'scompany’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company'scompany’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
| | /s/ PricewaterhouseCoopers LLP | PricewaterhouseCoopers LLP | Dallas, Texas | February 21, 201318, 2014 |
FLOWSERVE CORPORATION CONSOLIDATED BALANCE SHEETS | | | December 31, | December 31, | | 2012 | | 2011 | 2013 | | 2012 | | (Amounts in thousands, except per share data) | (Amounts in thousands, except per share data) | ASSETS | Current assets: | |
| | |
| |
| | |
| Cash and cash equivalents | $ | 304,252 |
| | $ | 337,356 |
| $ | 363,804 |
| | $ | 304,252 |
| Accounts receivable, net | 1,103,724 |
| | 1,060,249 |
| 1,155,327 |
| | 1,103,724 |
| Inventories, net | 1,086,663 |
| | 1,008,379 |
| 1,060,670 |
| | 1,086,663 |
| Deferred taxes | 151,093 |
| | 121,905 |
| 157,448 |
| | 151,093 |
| Prepaid expenses and other | 94,484 |
| | 100,465 |
| 110,133 |
| | 94,484 |
| Total current assets | 2,740,216 |
| | 2,628,354 |
| 2,847,382 |
| | 2,740,216 |
| Property, plant and equipment, net | 654,179 |
| | 598,746 |
| 716,289 |
| | 654,179 |
| Goodwill | 1,053,852 |
| | 1,045,077 |
| 1,107,551 |
| | 1,053,852 |
| Deferred taxes | 26,706 |
| | 17,843 |
| 19,533 |
| | 26,706 |
| Other intangible assets, net | 150,075 |
| | 163,482 |
| 160,548 |
| | 150,075 |
| Other assets, net | 185,930 |
| | 169,112 |
| 185,430 |
| | 185,930 |
| Total assets | $ | 4,810,958 |
| | $ | 4,622,614 |
| $ | 5,036,733 |
| | $ | 4,810,958 |
| LIABILITIES AND EQUITY | Current liabilities: | |
| | |
| |
| | |
| Accounts payable | $ | 616,900 |
| | $ | 597,342 |
| $ | 612,092 |
| | $ | 616,900 |
| Accrued liabilities | 906,593 |
| | 808,601 |
| 861,010 |
| | 906,593 |
| Debt due within one year | 59,478 |
| | 53,623 |
| 72,678 |
| | 59,478 |
| Deferred taxes | 7,654 |
| | 10,755 |
| 12,319 |
| | 7,654 |
| Total current liabilities | 1,590,625 |
| | 1,470,321 |
| 1,558,099 |
| | 1,590,625 |
| Long-term debt due after one year | 869,116 |
| | 451,593 |
| 1,127,619 |
| | 869,116 |
| Retirement obligations and other liabilities | 456,742 |
| | 422,470 |
| 473,894 |
| | 456,742 |
| Commitments and contingencies (See Note 13) |
|
| |
|
|
|
| |
|
| Shareholders’ equity: | |
| | |
| |
| | |
| Common shares, $1.25 par value | 73,664 |
| | 73,664 |
| 220,991 |
| | 220,991 |
| Shares authorized — 120,000 | |
| | |
| | Shares issued — 58,931 and 58,931, respectively | |
| | |
| | Shares authorized — 305,000 | | |
| | |
| Shares issued — 176,793 and 176,793, respectively | | |
| | |
| Capital in excess of par value | 615,183 |
| | 621,083 |
| 476,218 |
| | 467,856 |
| Retained earnings | 2,579,308 |
| | 2,205,524 |
| 2,985,391 |
| | 2,579,308 |
| Treasury shares, at cost — 10,796 and 5,025 shares, respectively | (1,164,496 | ) | | (424,052 | ) | | Treasury shares, at cost — 39,630 and 32,389 shares, respectively | | (1,600,266 | ) | | (1,164,496 | ) | Deferred compensation obligation | 10,870 |
| | 9,691 |
| 9,522 |
| | 10,870 |
| Accumulated other comprehensive loss | (224,310 | ) | | (216,097 | ) | (221,477 | ) | | (224,310 | ) | Total Flowserve Corporation shareholders’ equity | 1,890,219 |
| | 2,269,813 |
| 1,870,379 |
| | 1,890,219 |
| Noncontrolling interests | 4,256 |
| | 8,417 |
| 6,742 |
| | 4,256 |
| Total equity | 1,894,475 |
| | 2,278,230 |
| 1,877,121 |
| | 1,894,475 |
| Total liabilities and equity | $ | 4,810,958 |
| | $ | 4,622,614 |
| $ | 5,036,733 |
| | $ | 4,810,958 |
|
See accompanying notes to consolidated financial statements.
FLOWSERVE CORPORATION CONSOLIDATED STATEMENTS OF INCOME | | | | | | | | | | | | | | Year Ended December 31, | | 2013 | | 2012 | | 2011 | | (Amounts in thousands, except per share data) | Sales | $ | 4,954,619 |
| | $ | 4,751,339 |
| | $ | 4,510,201 |
| Cost of sales | (3,266,524 | ) | | (3,170,388 | ) | | (2,996,555 | ) | Gross profit | 1,688,095 |
| | 1,580,951 |
| | 1,513,646 |
| Selling, general and administrative expense | (966,829 | ) | | (922,125 | ) | | (914,080 | ) | Net earnings from affiliates (Note 2) | 39,017 |
| | 16,952 |
| | 19,111 |
| Operating income | 760,283 |
| | 675,778 |
| | 618,677 |
| Interest expense | (54,413 | ) | | (43,520 | ) | | (36,181 | ) | Interest income | 1,431 |
| | 954 |
| | 1,581 |
| Other (expense) income, net | (14,280 | ) | | (21,647 | ) | | 3,678 |
| Earnings before income taxes | 693,021 |
| | 611,565 |
| | 587,755 |
| Provision for income taxes | (204,701 | ) | | (160,766 | ) | | (158,524 | ) | Net earnings, including noncontrolling interests | 488,320 |
| | 450,799 |
| | 429,231 |
| Less: Net earnings attributable to noncontrolling interests | (2,790 | ) | | (2,460 | ) | | (649 | ) | Net earnings attributable to Flowserve Corporation | $ | 485,530 |
| | $ | 448,339 |
| | $ | 428,582 |
| Net earnings per share attributable to Flowserve Corporation common shareholders: | |
| | |
| | |
| Basic | $ | 3.43 |
| | $ | 2.86 |
| | $ | 2.57 |
| Diluted | 3.41 |
| | 2.84 |
| | 2.55 |
| Cash dividends declared per share | $ | 0.56 |
| | $ | 0.48 |
| | $ | 0.43 |
|
See accompanying notes to consolidated financial statements.
FLOWSERVE CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME | | | | | | | | | | | | | | Year Ended December 31, | | 2012 | | 2011 | | 2010 | | (Amounts in thousands, except per share data) | Sales | $ | 4,751,339 |
| | $ | 4,510,201 |
| | $ | 4,032,036 |
| Cost of sales | (3,170,388 | ) | | (2,996,555 | ) | | (2,622,343 | ) | Gross profit | 1,580,951 |
| | 1,513,646 |
| | 1,409,693 |
| Selling, general and administrative expense | (922,125 | ) | | (914,080 | ) | | (844,990 | ) | Net earnings from affiliates | 16,952 |
| | 19,111 |
| | 16,649 |
| Operating income | 675,778 |
| | 618,677 |
| | 581,352 |
| Interest expense | (43,520 | ) | | (36,181 | ) | | (34,301 | ) | Interest income | 954 |
| | 1,581 |
| | 1,575 |
| Other (expense) income, net | (21,647 | ) | | 3,678 |
| | (18,349 | ) | Earnings before income taxes | 611,565 |
| | 587,755 |
| | 530,277 |
| Provision for income taxes | (160,766 | ) | | (158,524 | ) | | (141,596 | ) | Net earnings, including noncontrolling interests | 450,799 |
| | 429,231 |
| | 388,681 |
| Less: Net earnings attributable to noncontrolling interests | (2,460 | ) | | (649 | ) | | (391 | ) | Net earnings attributable to Flowserve Corporation | $ | 448,339 |
| | $ | 428,582 |
| | $ | 388,290 |
| Net earnings per share attributable to Flowserve Corporation common shareholders: | |
| | |
| | |
| Basic | $ | 8.58 |
| | $ | 7.72 |
| | $ | 6.96 |
| Diluted | 8.51 |
| | 7.64 |
| | 6.88 |
| Cash dividends declared per share | $ | 1.44 |
| �� | $ | 1.28 |
| | $ | 1.16 |
|
| | | | | | | | | | | | | | Year Ended December 31, | | 2013 | | 2012 | | 2011 | | (Amounts in thousands) | Net earnings, including noncontrolling interests | $ | 488,320 |
| | $ | 450,799 |
| | $ | 429,231 |
| Other comprehensive income (loss): | |
| | |
| | |
| Foreign currency translation adjustments, net of taxes of $17,351, $(10,957) and $34,397 in 2013, 2012 and 2011, respectively | (28,870 | ) | | 18,184 |
| | (56,842 | ) | Pension and other postretirement effects, net of taxes of $(20,218), $8,655 and $3,107 in 2013, 2012 and 2011, respectively | 32,229 |
| | (26,983 | ) | | (8,490 | ) | Cash flow hedging activity, net of taxes of $(483), $187 and $186 in 2013, 2012 and 2011, respectively | (560 | ) | | 481 |
| | (307 | ) | Other comprehensive income (loss) | 2,799 |
| | (8,318 | ) | | (65,639 | ) | Comprehensive income, including noncontrolling interests | 491,119 |
| | 442,481 |
| | 363,592 |
| Comprehensive income attributable to noncontrolling interests | (2,756 | ) | | (2,354 | ) | | (601 | ) | Comprehensive income attributable to Flowserve Corporation | $ | 488,363 |
| | $ | 440,127 |
| | $ | 362,991 |
|
See accompanying notes to consolidated financial statements.
FLOWSERVE CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME | | | | | | | | | | | | | | Year Ended December 31, | | 2012 | | 2011 | | 2010 | | (Amounts in thousands) | Net earnings, including noncontrolling interests | $ | 450,799 |
| | $ | 429,231 |
| | $ | 388,681 |
| Other comprehensive loss: | |
| | |
| | |
| Foreign currency translation adjustments, net of taxes of $(10,957), $34,397 and $6,504 in 2012, 2011 and 2010, respectively | 18,184 |
| | (56,842 | ) | | (10,612 | ) | Pension and other postretirement effects, net of taxes of $8,655, $3,107 and $(2,921) in 2012, 2011 and 2010, respectively | (26,983 | ) | | (8,490 | ) | | 6,396 |
| Cash flow hedging activity, net of taxes of $187, $186 and $(1,730) in 2012, 2011 and 2010, respectively | 481 |
| | (307 | ) | | 2,823 |
| Other comprehensive loss | (8,318 | ) | | (65,639 | ) | | (1,393 | ) | Comprehensive income, including noncontrolling interests | 442,481 |
| | 363,592 |
| | 387,288 |
| Comprehensive income attributable to noncontrolling interests | (2,354 | ) | | (601 | ) | | (476 | ) | Comprehensive income attributable to Flowserve Corporation | $ | 440,127 |
| | $ | 362,991 |
| | $ | 386,812 |
|
See accompanying notes to consolidated financial statements.
FLOWSERVE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
| | | Total Flowserve Corporation Shareholders’ Equity | | | | | Total Flowserve Corporation Shareholders’ Equity | | | | | | | | | | Capital in Excess of Par Value | | Retained Earnings | | | | | | Deferred Compensation Obligation | | Accumulated Other Comprehensive Loss | | | | Total Equity | | | | | Capital in Excess of Par Value | | Retained Earnings | | | | | | Deferred Compensation Obligation | | Accumulated Other Comprehensive Loss | | | | Total Equity | | Common Stock | | Treasury Stock | | Noncontrolling Interests | | Common Stock | | Treasury Stock | | Noncontrolling Interests | | | Shares | | Amount | | Shares | | Amount | | | Shares | | Amount | | Shares | | Amount | | | (Amounts in thousands) | (Amounts in thousands) | Balance — January 1, 2010 | 58,875 |
| | $ | 73,594 |
| | $ | 611,745 |
| | $ | 1,526,774 |
| | (3,919 | ) | | $ | (275,656 | ) | | $ | 8,684 |
| | $ | (149,028 | ) | | $ | 5,634 |
| | $ | 1,801,747 |
| | Balance — January 1, 2011 | | 176,793 |
| | $ | 220,991 |
| | $ | 466,534 |
| | $ | 1,848,680 |
| | (11,616 | ) | | $ | (292,210 | ) | | $ | 9,533 |
| | $ | (150,506 | ) | | $ | 10,011 |
| | $ | 2,113,033 |
| Stock activity under stock plans | 56 |
| | 70 |
| | (40,343 | ) | | — |
| | 497 |
| | 29,462 |
| | — |
| | — |
| | — |
| | (10,811 | ) | — |
| | — |
| | (30,657 | ) | | — |
| | 990 |
| | 18,158 |
| | — |
| | — |
| | — |
| | (12,499 | ) | Stock-based compensation | — |
| | — |
| | 32,489 |
| | (61 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | 32,428 |
| — |
| | — |
| | 32,067 |
| | 23 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 32,090 |
| Tax benefit associated with stock-based compensation | — |
| | — |
| | 9,970 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 9,970 |
| — |
| | — |
| | 5,812 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 5,812 |
| Net earnings | — |
| | — |
| | — |
| | 388,290 |
| | — |
| | — |
| | — |
| | — |
| | 391 |
| | 388,681 |
| — |
| | — |
| | — |
| | 428,582 |
| | — |
| | — |
| | — |
| | — |
| | 649 |
| | 429,231 |
| Cash dividends declared | — |
| | — |
| | — |
| | (66,323 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (66,323 | ) | — |
| | — |
| | — |
| | (71,761 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (71,761 | ) | Repurchases of common shares | — |
| | — |
| | — |
| | — |
| | (450 | ) | | (46,016 | ) | | — |
| | — |
| | — |
| | (46,016 | ) | — |
| | — |
| | — |
| | — |
| | (4,449 | ) | | (150,000 | ) | | — |
| | — |
| | — |
| | (150,000 | ) | Foreign currency translation adjustments, net of tax | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (10,697 | ) | | 85 |
| | (10,612 | ) | | Pension and other postretirement effects, net of tax | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 6,396 |
| | — |
| | 6,396 |
| | Cash flow hedging activity, net of tax | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2,823 |
| | — |
| | 2,823 |
| | Sale of shares to (dividends paid to) noncontrolling interests, net | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 3,901 |
| | 3,901 |
| | Other, net | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 849 |
| | — |
| | — |
| | 849 |
| | Balance — December 31, 2010 | 58,931 |
| | $ | 73,664 |
| | $ | 613,861 |
| | $ | 1,848,680 |
| | (3,872 | ) | | $ | (292,210 | ) | | $ | 9,533 |
| | $ | (150,506 | ) | | $ | 10,011 |
| | $ | 2,113,033 |
| | Stock activity under stock plans | — |
| | — |
| | (30,657 | ) | | — |
| | 330 |
| | 18,158 |
| | — |
| | — |
| | — |
| | (12,499 | ) | | Stock-based compensation | — |
| | — |
| | 32,067 |
| | 23 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 32,090 |
| | Tax benefit associated with stock-based compensation | — |
| | — |
| | 5,812 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 5,812 |
| | Net earnings | — |
| | — |
| | — |
| | 428,582 |
| | — |
| | — |
| | — |
| | — |
| | 649 |
| | 429,231 |
| | Cash dividends declared | — |
| | — |
| | — |
| | (71,761 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (71,761 | ) | | Repurchases of common shares | — |
| | — |
| | — |
| | — |
| | (1,483 | ) | | (150,000 | ) | | — |
| | — |
| | — |
| | (150,000 | ) | | Foreign currency translation adjustments, net of tax | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (56,794 | ) | | (48 | ) | | (56,842 | ) | | Pension and other postretirement effects, net of tax | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (8,490 | ) | | — |
| | (8,490 | ) | | Cash flow hedging activity, net of tax | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (307 | ) | | — |
| | (307 | ) | | Other comprehensive loss, net of tax | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (65,591 | ) | | (48 | ) | | (65,639 | ) | Sale of shares to (dividends paid to) noncontrolling interests, net | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (2,195 | ) | | (2,195 | ) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (2,195 | ) | | (2,195 | ) | Other, net | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 158 |
| | — |
| | — |
| | 158 |
| — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 158 |
| | — |
| | — |
| | 158 |
| Balance — December 31, 2011 | 58,931 |
| | $ | 73,664 |
| | $ | 621,083 |
| | $ | 2,205,524 |
| | (5,025 | ) | | $ | (424,052 | ) | | $ | 9,691 |
| | $ | (216,097 | ) | | $ | 8,417 |
| | $ | 2,278,230 |
| 176,793 |
| | $ | 220,991 |
| | $ | 473,756 |
| | $ | 2,205,524 |
| | (15,075 | ) | | $ | (424,052 | ) | | $ | 9,691 |
| | $ | (216,097 | ) | | $ | 8,417 |
| | $ | 2,278,230 |
| Stock activity under stock plans | — |
| | — |
| | (50,490 | ) | | — |
| | 442 |
| | 31,498 |
| | — |
| | — |
| | — |
| | (18,992 | ) | — |
| | — |
| | (50,490 | ) | | — |
| | 1,326 |
| | 31,498 |
| | — |
| | — |
| | — |
| | (18,992 | ) | Stock-based compensation | — |
| | — |
| | 35,379 |
| | 24 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 35,403 |
| — |
| | — |
| | 35,379 |
| | 24 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 35,403 |
| Tax benefit associated with stock-based compensation | — |
| | — |
| | 11,024 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 11,024 |
| — |
| | — |
| | 11,024 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 11,024 |
| Net earnings | — |
| | — |
| | — |
| | 448,339 |
| | — |
| | — |
| | — |
| | — |
| | 2,460 |
| | 450,799 |
| — |
| | — |
| | — |
| | 448,339 |
| | — |
| | — |
| | — |
| | — |
| | 2,460 |
| | 450,799 |
| Cash dividends declared | — |
| | — |
| | — |
| | (74,579 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (74,579 | ) | — |
| | — |
| | — |
| | (74,579 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (74,579 | ) | Repurchases of common shares | — |
| | — |
| | — |
| | — |
| | (6,213 | ) | | (771,942 | ) | | — |
| | — |
| | — |
| | (771,942 | ) | — |
| | — |
| | — |
| | — |
| | (18,639 | ) | | (771,942 | ) | | — |
| | — |
| | — |
| | (771,942 | ) | Foreign currency translation adjustments, net of tax | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 18,289 |
| | (105 | ) | | 18,184 |
| | Pension and other postretirement effects, net of tax | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (26,983 | ) | | — |
| | (26,983 | ) | | Cash flow hedging activity, net of tax | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 481 |
| | — |
| | 481 |
| | Other comprehensive loss, net of tax | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (8,213 | ) | | (105 | ) | | (8,318 | ) | Purchase of shares from and dividends paid to noncontrolling interests | — |
| | — |
| | (1,813 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (6,516 | ) | — |
| (8,329 | ) | — |
| | — |
| | (1,813 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (6,516 | ) | | (8,329 | ) | Other, net | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,179 |
| | — |
| | — |
| | 1,179 |
| — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,179 |
| | — |
| | — |
| | 1,179 |
| Balance — December 31, 2012 | 58,931 |
| | $ | 73,664 |
| | $ | 615,183 |
| | $ | 2,579,308 |
| | (10,796 | ) | | $ | (1,164,496 | ) | | $ | 10,870 |
| | $ | (224,310 | ) | | $ | 4,256 |
| | $ | 1,894,475 |
| 176,793 |
| | $ | 220,991 |
| | $ | 467,856 |
| | $ | 2,579,308 |
| | (32,388 | ) | | $ | (1,164,496 | ) | | $ | 10,870 |
| | $ | (224,310 | ) | | $ | 4,256 |
| | $ | 1,894,475 |
| Stock activity under stock plans | | — |
| | — |
| | (37,491 | ) | | — |
| | 902 |
| | 22,540 |
| | — |
| | — |
| | — |
| | (14,951 | ) | Stock-based compensation | | — |
| | — |
| | 35,737 |
| | 20 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 35,757 |
| Tax benefit associated with stock-based compensation | | — |
| | — |
| | 10,116 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 10,116 |
| Net earnings | | — |
| | — |
| | — |
| | 485,530 |
| | — |
| | — |
| | — |
| | — |
| | 2,790 |
| | 488,320 |
| Cash dividends declared | | — |
| | — |
| | — |
| | (79,467 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (79,467 | ) | Repurchases of common shares | | — |
| | — |
| | — |
| | — |
| | (8,144 | ) | | (458,310 | ) | | — |
| | — |
| | — |
| | (458,310 | ) | Other comprehensive income, net of tax | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2,833 |
| | (34 | ) | | 2,799 |
| Purchase of shares from and dividends paid to noncontrolling interests | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (270 | ) | | (270 | ) | Other, net | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1,348 | ) | | — |
| | — |
| | (1,348 | ) | Balance — December 31, 2013 | | 176,793 |
| | $ | 220,991 |
| | $ | 476,218 |
| | $ | 2,985,391 |
| | (39,630 | ) | | $ | (1,600,266 | ) | | $ | 9,522 |
| | $ | (221,477 | ) | | $ | 6,742 |
| | $ | 1,877,121 |
| See accompanying notes to consolidated financial statements. |
FLOWSERVE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS | | | Year Ended December 31, | Year Ended December 31, | | 2012 | | 2011 | | 2010 | 2013 | | 2012 | | 2011 | | (Amounts in thousands) | (Amounts in thousands) | Cash flows — Operating activities: | |
| | |
| | |
| |
| | |
| | |
| Net earnings, including noncontrolling interests | $ | 450,799 |
| | $ | 429,231 |
| | $ | 388,681 |
| $ | 488,320 |
| | $ | 450,799 |
| | $ | 429,231 |
| Adjustments to reconcile net earnings to net cash provided by operating activities: | |
| | |
| | |
| |
| | |
| | |
| Depreciation | 88,572 |
| | 90,653 |
| | 90,509 |
| 90,695 |
| | 88,572 |
| | 90,653 |
| Amortization of intangible and other assets | 18,654 |
| | 16,908 |
| | 14,032 |
| 15,697 |
| | 18,654 |
| | 16,908 |
| Loss on early extinguishment of debt | 1,293 |
| | — |
| | 1,601 |
| | Net (gain) loss on the disposition of assets | (10,521 | ) | | (149 | ) | | 356 |
| | Gain on sale of investment | — |
| | — |
| | (3,993 | ) | | Loss on amendment and early extinguishment of debt | | 439 |
| | 1,293 |
| | — |
| Net loss (gain) on the disposition of assets | | 956 |
| | (10,521 | ) | | (149 | ) | Gain on sale of equity investment in affiliate | | (12,995 | ) | | — |
| | — |
| Gain on remeasurement of acquired assets | | (15,315 | ) | | — |
| | — |
| Excess tax benefits from stock-based payment arrangements | (11,207 | ) | | (5,668 | ) | | (10,048 | ) | (10,111 | ) | | (11,207 | ) | | (5,668 | ) | Stock-based compensation | 35,403 |
| | 32,090 |
| | 32,428 |
| 35,757 |
| | 35,403 |
| | 32,090 |
| Net earnings from affiliates, net of dividends received | (8,535 | ) | | (5,213 | ) | | (9,990 | ) | (6,168 | ) | | (8,535 | ) | | (5,213 | ) | Change in assets and liabilities, net of acquisitions: | |
| | |
| | |
| |
| | |
| | |
| Accounts receivable, net | (35,074 | ) | | (243,118 | ) | | (51,974 | ) | (53,823 | ) | | (35,074 | ) | | (243,118 | ) | Inventories, net | (72,706 | ) | | (139,754 | ) | | (52,905 | ) | 28,616 |
| | (72,706 | ) | | (139,754 | ) | Prepaid expenses and other | (4,863 | ) | | (12,227 | ) | | (2,363 | ) | (6,824 | ) | | (4,863 | ) | | (12,227 | ) | Other assets, net | 2,393 |
| | (3,629 | ) | | 6,763 |
| (18,002 | ) | | 2,393 |
| | (3,629 | ) | Accounts payable | 18,179 |
| | 45,845 |
| | 70,741 |
| (12,331 | ) | | 18,179 |
| | 45,845 |
| Accrued liabilities and income taxes payable | 90,773 |
| | (6,901 | ) | | (125,591 | ) | (65,702 | ) | | 90,773 |
| | (6,901 | ) | Retirement obligations and other liabilities | (21,553 | ) | | 6,682 |
| | (20,296 | ) | (3,145 | ) | | (21,553 | ) | | 6,682 |
| Net deferred taxes | (24,477 | ) | | 13,463 |
| | 27,824 |
| 31,695 |
| | (24,477 | ) | | 13,463 |
| Net cash flows provided by operating activities | 517,130 |
| | 218,213 |
| | 355,775 |
| 487,759 |
| | 517,130 |
| | 218,213 |
| Cash flows — Investing activities: | |
| | |
| | |
| |
| | |
| | |
| Capital expenditures | (135,539 | ) | | (107,967 | ) | | (102,002 | ) | (139,090 | ) | | (135,539 | ) | | (107,967 | ) | Payments for acquisitions, net of cash acquired | (3,996 | ) | | (90,505 | ) | | (199,396 | ) | (76,801 | ) | | (3,996 | ) | | (90,505 | ) | Proceeds from disposal of assets | 16,933 |
| | 4,269 |
| | 11,030 |
| 1,653 |
| | 16,933 |
| | 4,269 |
| Affiliate investment activity, net | (3,825 | ) | | — |
| | 3,651 |
| | Proceeds from (contributions to) equity investments in affiliates | | 46,240 |
| | (3,825 | ) | | — |
| Net cash flows used by investing activities | (126,427 | ) | | (194,203 | ) | | (286,717 | ) | (167,998 | ) | | (126,427 | ) | | (194,203 | ) | Cash flows — Financing activities: | |
| | |
| | |
| |
| | |
| | |
| Excess tax benefits from stock-based payment arrangements | 11,207 |
| | 5,668 |
| | 10,048 |
| 10,111 |
| | 11,207 |
| | 5,668 |
| Payments on long-term debt | (480,000 | ) | | (25,000 | ) | | (544,016 | ) | (25,000 | ) | | (480,000 | ) | | (25,000 | ) | Proceeds from issuance of senior notes | 498,075 |
| | — |
| | — |
| 298,596 |
| | 498,075 |
| | — |
| Proceeds from issuance of long-term debt | 400,000 |
| | — |
| | 500,000 |
| — |
| | 400,000 |
| | — |
| Proceeds from short-term financing | 475,000 |
| | — |
| | — |
| | Payments on short-term financing | (475,000 | ) | | — |
| | — |
| | Payments of deferred loan costs | (9,901 | ) | | — |
| | (11,596 | ) | (3,744 | ) | | (9,901 | ) | | — |
| Borrowings under other financing arrangements, net | 5,807 |
| | 1,581 |
| | 2,421 |
| (401 | ) | | 5,807 |
| | 1,581 |
| Repurchases of common shares | (771,942 | ) | | (150,000 | ) | | (46,015 | ) | (458,310 | ) | | (771,942 | ) | | (150,000 | ) | Payments of dividends | (73,765 | ) | | (69,557 | ) | | (63,582 | ) | (76,897 | ) | | (73,765 | ) | | (69,557 | ) | Other | (8,403 | ) | | (1,648 | ) | | 9,827 |
| (179 | ) | | (8,403 | ) | | (1,648 | ) | Net cash flows used by financing activities | (428,922 | ) | | (238,956 | ) | | (142,913 | ) | (255,824 | ) | | (428,922 | ) | | (238,956 | ) | Effect of exchange rate changes on cash | 5,115 |
| | (5,277 | ) | | (22,886 | ) | (4,385 | ) | | 5,115 |
| | (5,277 | ) | Net change in cash and cash equivalents | (33,104 | ) | | (220,223 | ) | | (96,741 | ) | 59,552 |
| | (33,104 | ) | | (220,223 | ) | Cash and cash equivalents at beginning of year | 337,356 |
| | 557,579 |
| | 654,320 |
| 304,252 |
| | 337,356 |
| | 557,579 |
| Cash and cash equivalents at end of year | $ | 304,252 |
| | $ | 337,356 |
| | $ | 557,579 |
| $ | 363,804 |
| | $ | 304,252 |
| | $ | 337,356 |
| Income taxes paid (net of refunds) | $ | 158,433 |
| | $ | 113,921 |
| | $ | 135,892 |
| $ | 195,532 |
| | $ | 158,433 |
| | $ | 113,921 |
| Interest paid | 33,625 |
| | 32,368 |
| | 31,009 |
| 43,506 |
| | 33,625 |
| | 32,368 |
| See accompanying notes to consolidated financial statements. |
FLOWSERVE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 20122013 AND 20112012 AND FOR THE THREE YEARS ENDED DECEMBER 31, 20122013
| | 1. | SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING DEVELOPMENTS |
We are principally engaged in the worldwide design, manufacture, distribution and service of industrial flow management equipment. We provide long lead time, custom and other highly-engineered pumps; standardized, general-purpose pumps; mechanical seals; industrial valves; and related automation products and solutions primarily for oil and gas, chemical, power generation, water management and other general industries requiring flow management products and services. Equipment manufactured and serviced by us is predominantly used in industries that deal with difficult-to-handle and corrosive fluids, as well as environments with extreme temperatures, pressure, horsepower and speed. Our business is affected by economic conditions in the United States ("U.S.") and other countries where our products are sold and serviced, by the cyclical nature and competitive environment of the oil and gas, chemical, power generation, water management and other generalour industries served, by the relationship of the U.S. dollar to other currencies and by the demand for and pricing of our customers’ end products. Stock Split — On June 7, 2013 we recorded a three-for-one stock split. Shareholders' equity and all share data, including treasury shares and stock-based compensation award shares, and per share data presented herein have been retrospectively adjusted to reflect the impact of the increase in authorized shares and the stock split, as appropriate. Details of the stock split are included in Note 15. Venezuela — Effective February 13, 2013, the Venezuelan government devalued its currency (bolivar) from 4.3 to 6.3 bolivars to the U.S. dollar. Our operations in Venezuela generally consist of a service center that performs service and repair activities. 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. Our Venezuelan subsidiary's sales for the year ending December 31, 2013 and total assets at December 31, 2013 represented less than 1% of consolidated sales and total assets for the same periods. As a result of the devaluation, we recognized a loss of $4.0 million in the first quarter of 2013. The loss was reported in other (expense) income, net in our consolidated statements of income and resulted in no tax benefit. We have evaluated the carrying value of related assets and concluded that there is no current impairment. We are continuing to monitor actions of the Venezuelan government and local economic conditions that may adversely impact our future consolidated financial condition or results of operations, including impacts on our Venezuelan operations, imports into the market and our Venezuelan subsidiary's ability to remit cash for dividends and other payments at the official rate. Principles of Consolidation — The consolidated financial statements include the accounts of our company and our wholly and majority-owned subsidiaries. In addition, we would consolidate any variable interest entities for which we are deemed to be the primary beneficiary. Noncontrolling interests of non-affiliated parties have been recognized for all majority-owned consolidated subsidiaries. Intercompany profits/losses, transactions and balances among consolidated entities have been eliminated from our consolidated financial statements. Investments in unconsolidated affiliated companies, which represent noncontrolling ownership interests between 20% and 50%, are accounted for using the equity method, which approximates our equity interest in their underlying equivalent net book value under accounting principles generally accepted in the U.S. ("U.S. GAAP"). Investments in interests where we own less than 20% of the investee are accounted for by the cost method, whereby income is only recognized in the event of dividend receipt. Investments accounted for by the cost method are tested for impairment if an impairment indicator is present. Use of Estimates — The process of preparing financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect reported amounts of certain assets, liabilities, revenues and expenses. We believe our estimates and assumptions are reasonable; however, actual results may differ materially from such estimates. The most significant estimates and assumptions are used in determining: Revenue recognition, net of liquidated damages and other delivery penalties; Income taxes, 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. Revenue Recognition — Revenues for product sales are recognized when the risks and rewards of ownership are transferred to the customers, which is typically based on the contractual delivery terms agreed to with the customer and fulfillment of all but inconsequential or perfunctory actions. In addition, our policy requires persuasive evidence of an arrangement, a fixed or
determinable sales price and reasonable assurance of collectability. We defer the recognition of revenue when advance payments are received from customers before performance obligations have been completed and/or services have been performed. Freight charges billed to customers are included in sales and the related shipping costs are included in cost of sales in our consolidated statements of income. Our contracts typically include cancellation provisions that require customers to reimburse us for costs incurred up to the date of cancellation, as well as any contractual cancellation penalties. We enter into certain contractsagreements with multiple deliverables that may include any combination of designing, developing, manufacturing, modifying, installing and commissioning of flow management equipment and providing services related to the performance of such products. Delivery of these products and services typically occurs within a one to two-year period, although many arrangements, such as "book and ship""short-cycle" type orders, have a shorter timeframe for delivery. We aggregate or separate deliverables into units of accounting based on whether the deliverable(s) have standalone value to the customer and when no(impact of general rightrights of return exists.is immaterial). Contract value is allocated ratably to the units of accounting in the arrangement based on their relative selling prices determined as if the deliverables were sold separately. Revenues for long-term contracts that exceed certain internal thresholds regarding the size and duration of the project and provide for the receipt of progress billings from the customer are recorded on the percentage of completion method with progress
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
measured on a cost-to-cost basis. Percentage of completion revenue represents less than 9%7% of our consolidated sales for each year presented. Revenue on service and repair contracts is recognized after services have been agreed to by the customer and rendered. Revenues generated under fixed fee service and repair contracts are recognized on a ratable basis over the term of the contract. These contracts can range in duration, but generally extend for up to five years. Fixed fee service contracts represent aproximatelyapproximately 1% of consolidated sales for each year presented. In certain instances, we provide guaranteed completion dates under the terms of our contracts. Failure to meet contractual delivery dates can result in late delivery penalties or non-recoverable costs. In instances where the payment of such costs are deemed to be probable, we perform a project profitability analysis, accounting for such costs as a reduction of realizable revenues, which could potentially cause estimated total project costs to exceed projected total revenues realized from the project. In such instances, we would record reserves to cover such excesses in the period they are determined. In circumstances where the total projected revenues still exceed total projected costs, the incurrence of penalties or non-recoverable costs generally reduces profitability of the project at the time of subsequent revenue recognition. Cash and Cash Equivalents — We place temporary cash investments with financial institutions and, by policy, invest in those institutions and instruments that have minimal credit risk and market risk. These investments, with an original maturity of three months or less when purchased, are classified as cash equivalents. They are highly liquid and principal values are not subject to significant risk of change due to interest rate fluctuations. Allowance for Doubtful Accounts and Credit Risk — The allowance for doubtful accounts is established based on estimates of the amount of uncollectible accounts receivable, which is determined principally based upon the aging of the accounts receivable, but also customer credit history, industry and market segment information, economic trends and conditions and credit reports. Customer credit issues, customer bankruptcies or general economic conditions may also impact our estimates. Credit risks are mitigated by the diversity of our customer base across many different geographic regions and industries and by performing creditworthiness analyses on our customers. Additionally, we mitigate credit risk through letters of credit and advance payments received from our customers. As of December 31, 20122013 and 20112012, although we have experienced increased aging and slower collection of certain receivables in Latin America during 2013 we do not believe that we have any significant concentrations of credit risk. Inventories and Related Reserves — Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out method. Reserves for excess and obsolete inventories are based upon our assessment of market conditions for our products determined by historical usage and estimated future demand. Due to the long life cycles of our products, we carry spare parts inventories that have historically low usage rates and provide reserves for such inventory based on demonstrated usage and aging criteria. Income Taxes, Deferred Taxes, Tax Valuation Allowances and Tax Reserves — We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are calculated using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. We record valuation allowances
to reflect the estimated amount of deferred tax assets that may not be realized based upon our analysis of existing deferred tax assets, net operating losses and tax credits by jurisdiction and expectations of our ability to utilize these tax attributes through a review of past, current and estimated future taxable income and establishment of tax strategies. We provide deferred taxes for the temporary differences associated with our investment in foreign subsidiaries that have a financial reporting basis that exceeds tax basis, unless we can assert permanent reinvestment in foreign jurisdictions. Financial reporting basis and tax basis differences in investments in foreign subsidiaries consist of both unremitted earnings and losses, as well as foreign currency translation adjustments. The amount of income taxes we pay is subject to ongoing audits by federal, state, and foreign tax authorities, which often result in proposed assessments. We establish reserves for open tax years for uncertain tax positions that may be subject to challenge by various tax authorities. The consolidated tax provision and related accruals include the impact of such reasonably estimable losses and related interest and penalties as deemed appropriate. We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities. The determination is based on the technical merits of the position and presumes that each uncertain tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information.
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. Legal and Environmental AccrualsContingencies — Legal and environmental reserves are recorded based upon a case-by-case analysis of the relevant facts and circumstances and an assessment of potential legal obligations and costs. Amounts relating to legal and environmental liabilities are recorded when it is probable that a loss has been incurred and such loss is estimable. Assessments of legal and environmental costs are based on information obtained from our independent and in-house experts and our loss experience in similar situations. Estimates are updated as applicable when new information regarding the facts and circumstances of each matter becomes available. Legal fees associated with legal and environmental liabilities are expensed as incurred. Estimates of liabilities for unsettled asbestos-related claims are based on known claims and on our experience during the preceding two years for claims filed, settled and dismissed, with adjustments for events deemed unusual and unlikely to recur, and are included in retirement obligations and other liabilities in our consolidated balance sheets. A substantial majority of our asbestos-related claims are covered by insurance or indemnities. Estimated indemnities and receivables from insurance carriers for unsettled claims and receivables for settlements and legal fees paid by us for asbestos-related claims are estimated using our historical experience with insurance recovery rates and estimates of future recoveries, which include estimates of coverage and financial viability of our insurance carriers. Estimated receivables are included in other assets, net in our consolidated balance sheets. We have claims pending against certain insurers that, if resolved more favorably than estimated future recoveries, 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 existing indemnities and insurance coverage. Warranty Accruals — Warranty obligations are based upon product failure rates, materials usage, service delivery costs, an analysis of all identified or expected claims and an estimate of the cost to resolve such claims. The estimates of expected claims are generally a factor of historical claims and known product issues. Warranty obligations based on these factors are adjusted based on historical sales trends for the preceding 24 months. Insurance Accruals — Insurance accruals are recorded for wholly or partially self-insured risks such as medical benefits and workers’ compensation and are based upon an analysis of our claim loss history, insurance deductibles, policy limits and other relevant factors that are updated annually and are included in accrued liabilities in our consolidated balance sheets. The estimates are based upon information received from actuaries, insurance company adjusters, independent claims administrators or other independent sources. Receivables from insurance carriers are estimated using our historical experience with insurance recovery rates and estimates of future recoveries, which include estimates of coverage and financial viability of our insurance carriers. Estimated receivables are included in accounts receivable, net and other assets, net, as applicable, in our consolidated balance sheets. Pension and Postretirement Obligations — Determination of pension and postretirement benefits obligations is based on estimates made by management in consultation with independent actuaries and investment advisors. Inherent in these valuations are assumptions including discount rates, expected rates of return on plan assets, retirement rates, mortality rates and rates of compensation increase and other factors all of which are reviewed annually and updated if necessary. Current market conditions, including changes in rates of return, interest rates and medical inflation rates, are considered in selecting these assumptions.
Actuarial gains and losses and prior service costs are recognized in accumulated other comprehensive loss as they arise and we amortize these costs into net pension expense over the remaining expected service period. Property, Plant and Equipment and Depreciation — Property, plant and equipment are stated at historical cost, less accumulated depreciation. If asset retirement obligations exist, they are capitalized as part of the carrying amount of the asset and depreciated over the remaining useful life of the asset. The useful lives of leasehold improvements are the lesser of the remaining lease term or the useful life of the improvement. When assets are retired or otherwise disposed of, their costs and related accumulated depreciation are removed from the accounts and any resulting gains or losses are included in income from operations for the period. Depreciation is computed by the straight-line method based on the estimated useful lives of the depreciable assets, or in the case of assets under capital leases, over the related lease turn. Generally, the estimated useful lives of the assets are: | | | Buildings and improvements | 10 to 40 years | Machinery, equipment and tooling | 3 to 14 years | Software, furniture and fixtures and other | 3 to 7 years |
Costs related to routine repairs and maintenance are expensed as incurred.
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Internally Developed Software — We capitalize certain costs associated with the development of internal-use software. Generally, these costs are related to significant software development projects and are amortized over their estimated useful life, typically three to five years, upon implementation of the software. Intangible Assets — Intangible assets, excluding trademarks (which are considered to have an indefinite life), consist primarily of engineering drawings, patents, existing customer relationships, software, distribution networks and other items that are being amortized over their estimated useful lives generally ranging from three to 40 years. These assets are reviewed for impairment whenever events and circumstances indicate impairment may have occurred. Valuation of Goodwill, Indefinite-Lived Intangible Assets and Other Long-Lived Assets — The value of 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. The identification of our reporting units began at the operating segment level and considered whether components one level below the operating segment levels should be identified as reporting units for purpose of testing goodwill for impairment based on certain conditions. These conditions included, among other factors, (i) the extent to which a component represents a business and (ii) the aggregation of economically similar components within the operating segments and resulted in eight reporting units. Other factors that were considered in determining whether the aggregation of components was appropriate included the similarity of the nature of the products and services, the nature of the production processes, the methods of distribution and the types of industries served. Impairment lossesAn impairment loss for goodwill areis recognized wheneverif the implied fair value of goodwill is less than the carrying value. We estimate the fair value of our reporting units based on an income approach, whereby we calculate the fair value of a reporting unit based on the present value of estimated future cash flows. A discounted cash flow analysis requires us to make various judgmental assumptions about future sales, operating margins, growth rates and discount rates, which are based on our budgets, business plans, economic projections, anticipated future cash flows and market participants. Assumptions are also made for varying perpetual growth rates for periods beyond the long-term business plan period. We did not record an impairment of goodwill in 20122013, 20112012 or 20102011.
We also consider our market capitalization in our evaluation of the fair value of our goodwill. Our market capitalization increased as compared with 20112012 and did not indicate a potential impairment of our goodwill as of December 31, 20122013. Impairment losses for indefinite-lived intangible assets are recognized whenever the estimated fair value is less than the carrying value. Fair values are calculated for trademarks using a "relief from royalty" method, which estimates the fair value of the trademarksa trademark by determining the present value of estimated royalty payments that are avoided as a result of owning the trademark. This method includes judgmental assumptions about sales growth and discount rates that have a significant impact on the fair value and are substantially consistent with the assumptions used to determine the fair value of our reporting units discussed above. We did not record a material impairment of our trademarks in20122013, 20112012 or 20102011. The net realizablerecoverable value of other long-lived assets, including property, plant and equipment and finite-lived intangible assets, is reviewed when indicators of potential impairments are present. The net realizablerecoverable value is based upon an assessment of the estimated future cash flows related to those assets, utilizing a methodologyassumptions similar to thatthose for goodwill. Additional considerations related to our long-lived assets include expected maintenance and improvements, changes in expected uses and ongoing operating performance and utilization.
Deferred Loan Costs — Deferred loan costs, consisting of fees and other expenses associated with debt financing, are amortized over the term of the associated debt using the effective interest method. Additional amortization is recorded in periods where optional prepayments on debt are made. Fair Values of Financial Instruments — Except forOur financial instruments are presented at fair value in our senior notes,consolidated balance sheets, with the carrying amountsexception of our financial instruments approximatedlong-term debt. 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 at December 31, 2012 and 2011.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 consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair values. Hierarchical levels, as defined by Accounting Standards Codification ("ASC") 820, "Fair Value Measurements and Disclosures," are directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities. An asset or a liability’s categorization within the fair value hierarchy is based on the lowest level of significant input to its valuation. Hierarchical levels are as follows: Level I — Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Level II — Inputs (other than quoted prices included in Level I) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life. Level III — Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model. Recurring fair value measurements are limited to investments in derivative instruments and certain equity securities. 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 derivative instruments are included in Note 6. The fair value measurements of our investments in equity securities are determined using quoted market prices and are classified as Level I. The fair values of our investments in equity securities, and changes thereto, are immaterial to our consolidated financial position and results of operations. Derivatives and Hedging Activities — We have a risk-managementforeign currency derivatives and derivativeshedging policy outlining the conditions under which we can enter into financial derivative transactions. We do not use derivativesderivative instruments for trading or speculative purposes. All derivativesderivative instruments are recognized on the balance sheet at their fair values. The accounting for gains and losses resulting from changes in fair value depends on the use ofwhether the derivative and whether it is designated and qualifies for hedge accounting.
Forward Exchange Contracts —We employ a foreign currency economic hedging strategy to mitigate certain financial risks resulting from foreign currency exchange rate movements that impact foreign currency denominated receivables and payables, firm committed transactions and forecasted sales and purchases. AsIn the fourth quarter of 2013, we have not electedbegan to designate certain forward exchange contracts as hedging instruments and apply hedge accounting to these derivatives,those instruments.
For designated forward exchange contracts, the changes in fair value are recorded in other comprehensive loss until the underlying hedged item affects earnings, at which time the change in fair value is recognized in sales in the consolidated statements of income. For non-designated forward exchange contracts, the changes in the fair values are recognized currentlyimmediately in other (expense) income, net in the consolidated statements of income. See Note 6 for further discussion of forward exchange contracts.
Interest Rate Swaps — We enter into interest rate swap agreements for the purpose of hedging our cash flow exposure to floating interest rates on certain portions of our debt. We document the hedging relationship between hedging instruments and hedged items, the risk management objective and strategy for entering into the hedges and the designation of the formal hedging relationship. We assess (both at the inception of a hedge and on an ongoing basis) whether the derivatives have been highly effective in offsetting changes in the fair value or cash flows of hedged items and whether those derivatives may be expected to remain highly effective in future periods. Changes in the fair value of a derivative that is highly effective, documented, designated and qualified as a cash flow hedge, to the extent that the hedge is effective,interest rate swap are recorded in other comprehensive loss until earnings are affected by the variability of cash flows of theunderlying hedged transaction.item. Any ineffective portion of the gain or loss is immediately recognized in earnings. No gain or loss due to ineffectiveness was recorded in the years ended December 31, 2012, 2011 or 2010. Upon settlement, realized gains and losses are recognized in interest expense in the consolidated statements of income. See Note 6 for further discussion of interest rate swaps.
We discontinue hedge accounting when (1) we deem the hedge to be ineffective and determine that the designation of the derivative as a hedging instrument is no longer appropriate; (2) the derivative no longer effectively offsets changes in the cash flows of a hedged item (such as firm commitments or contracts); (3) the derivative expires,matures, terminates or is sold; or (4)(3) occurrence of the contracted or committed transaction is no longer probable or will not occur in the originally expected period.
When hedge accounting is discontinued and the derivative remains outstanding, we carry the derivative at its estimated fair value on the balance sheet, recognizing changes in the fair value in current period earnings. If a cash flow hedge becomes ineffective, any deferred gains or losses on the cash flow hedge remain in accumulated other comprehensive loss until the exposure relating to theunderlying hedged item underlying the hedge is recognized. If it becomes probable that a hedged forecasted transaction will not occur, deferred gains or losses on the hedging instrument are recognized in earnings immediately.
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 forward exchange contracts and interest rate swap agreements and expect all counterparties to meet their obligations. If necessary, we would adjust the values of our derivative contracts for our or our counterparties’ credit risks. Foreign Currency Translation — Assets and liabilities of our foreign subsidiaries are translated to U.S. dollars at exchange rates prevailing at the balance sheet date, while income and expenses are translated at average rates for each month. Translation gains and losses are reported as a component of accumulated other comprehensive loss. Transactional currency gains and losses arising from transactions in currencies other than our sites’ functional currencies are included in our consolidated results of operations. Transaction and translation gains and losses arising from intercompany balances are reported as a component of accumulated other comprehensive loss when the underlying transaction stems from a long-term equity investment or from debt designated as not due in the foreseeable future. Otherwise, we recognize transaction gains and losses arising from intercompany transactions as a component of income. Where intercompany balances are not long-term investment related or not designated as due beyond the foreseeable future, we may mitigate risk associated with foreign currency fluctuations by entering into forward exchange contracts. Stock-Based Compensation — Stock-based compensation is measured at the grant-date fair value. The exercise price of stock option awards and the value of restricted share, restricted share unit and performance-based unit awards (collectively referred to as "Restricted Shares") are set at the closing price of our common stock on the New York Stock Exchange on the date of grant,
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
which is the date such grants are authorized by our Board of Directors. Restricted share units and performance-based units refer to restricted awards that do not have voting rights and accrue dividends, which are forfeited if vesting does not occur. The intrinsic value of Restricted Shares, which is typically the product of share price at the date of grant and the number of Restricted Shares granted, is amortized on a straight-line basis to compensation expense over the periods in which the restrictions lapse based on the expected number of shares that will vest. The forfeiture rate is based on unvested Restricted Shares forfeited compared with original total Restricted Shares granted over a 4-year period, excluding significant forfeiture events that are not expected to recur. Earnings Per Share — We use the two-class method of calculating Earnings Per Share ("EPS"), which determines earnings per share for each class of common stock and participating security as if all earnings for the period had been distributed. Unvested restricted share awards that earn non-forfeitable dividend rights qualify as participating securities and, accordingly, are included in the basic computation as such. Our unvested restricted shares participate on an equal basis with common shares; therefore, there is no difference in undistributed earnings allocated to each participating security. Accordingly, the presentation below is prepared on a combined basis and is presented as earnings per common share. The following is a reconciliation of net earnings of Flowserve Corporation and weighted average shares for calculating basic net earnings per common share.
Earnings per weighted average common share outstanding was calculated as follows: | | | Year Ended December 31, | Year Ended December 31, | | 2012 | | 2011 | | 2010 | 2013 | | 2012 | | 2011 | | (Amounts in thousands, except per share data) | (Amounts in thousands, except per share data) | Net earnings of Flowserve Corporation | $ | 448,339 |
| | $ | 428,582 |
| | $ | 388,290 |
| $ | 485,530 |
| | $ | 448,339 |
| | $ | 428,582 |
| Dividends on restricted shares not expected to vest | 15 |
| | 15 |
| | 16 |
| 13 |
| | 15 |
| | 15 |
| Earnings attributable to common and participating shareholders | $ | 448,354 |
| | $ | 428,597 |
| | $ | 388,306 |
| $ | 485,543 |
| | $ | 448,354 |
| | $ | 428,597 |
| Weighted average shares: | |
| | |
| | |
| |
| | |
| | |
| Common stock | 52,019 |
| | 55,273 |
| | 55,434 |
| 140,901 |
| | 156,057 |
| | 165,819 |
| Participating securities | 264 |
| | 270 |
| | 330 |
| 698 |
| | 792 |
| | 809 |
| Denominator for basic earnings per common share | 52,283 |
| | 55,543 |
| | 55,764 |
| 141,599 |
| | 156,849 |
| | 166,628 |
| Effect of potentially dilutive securities | 373 |
| | 559 |
| | 651 |
| 830 |
| | 1,121 |
| | 1,679 |
| Denominator for diluted earnings per common share | 52,656 |
| | 56,102 |
| | 56,415 |
| 142,429 |
| | 157,970 |
| | 168,307 |
| Net earnings per share attributable to Flowserve Corporation common shareholders: | |
| | |
| | |
| |
| | |
| | |
| Basic | $ | 8.58 |
| | $ | 7.72 |
| | $ | 6.96 |
| $ | 3.43 |
| | $ | 2.86 |
| | $ | 2.57 |
| Diluted | 8.51 |
| | 7.64 |
| | 6.88 |
| 3.41 |
| | 2.84 |
| | 2.55 |
|
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, restricted share units and performance share units. For each of the three years ended December 31, 20122013, 20112012 and 20102011, we had no options to purchase common stock that were excluded from the computations of potentially dilutive securities because none were considered to be anti-dilutive. Research and Development Expense — Research and development costs are charged to expense when incurred. Aggregate research and development costs included in selling, general and administrative expenses ("SG&A") were $37.8 million, $38.9 million and $35.0 million and $29.5 million in 20122013, 20112012 and 20102011, respectively. Costs incurred for research and development primarily include salaries and benefits and consumable supplies, as well as rent, professional fees, utilities and the depreciation of property and equipment used in research and development activities.
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Accounting Developments Pronouncements Implemented In MayDecember 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2011-04, "Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs," which clarifies the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements in order to improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and International Financial Reporting Standards ("IFRSs"). The amendments do not result in a major change in the application of the requirements in Topic 820, but clarify the application of existing fair value measurement requirements and change particular principles or requirements for measuring fair value and for disclosing information about fair value measurements. Our adoption of ASU No. 2011-04, effective January 1, 2012, had no impact on our consolidated financial condition and results of operations. In June 2011, the FASB issued ASU No. 2011-05, "Comprehensive Income (Topic 220): Presentation of Comprehensive Income," which specifies that an entity has the option to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This amendment also requires an entity to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income. In December 2011, the FASB issued ASU No. 2011-12, "Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05," to defer the requirement to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income. Our adoption of ASU Nos. 2011-05 and 2011-12, effective January 1, 2012, had no impact on our consolidated financial condition and results of operations.
In September 2011, the FASB issued ASU No. 2011-08, "Intangibles - Goodwill and Other (Topic 350): Testing Goodwill for Impairment," which specifies that an entity has the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. An entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. Our adoption of ASU No. 2011-08, effective January 1, 2012, had no impact on our consolidated financial condition and results of operations.
Pronouncements Not Yet Implemented
In December 2011, the FASB issued ASU No. 2011-11, "Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities," which requires enhanced disclosures about financial instruments and derivative instruments that are either (1) offset in accordance with either Accounting Standards Codification ("ASC") 210-20-45, "Balance Sheet - Offsetting," or ASC 815-10-45, "Derivatives and Hedging - Overall," or (2) subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in accordance with either ASC 210-20-45 or ASC 815-10-45. ASU No. 2011-11 is effective for fiscal years, and interim periods within those years, beginning after December 31, 2012. The disclosure requirements shall be applied retrospectively for all periods presented. TheOur adoption of ASU No. 2011-11, will not haveeffective January 1, 2013, had no impact on our consolidated financial condition and results of operations.
In January 2013, the FASB issued ASU No. 2013-01, "Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities," which limits the scope of ASU 2011-11 to derivatives, repurchase agreements and securities lending transactions to the extent that they are (1) offset in the financial statements or (2) subject to an enforceable master netting arrangement or similar agreement. The disclosure requirements shall be applied retrospectively for all periods presented. Our adoption of ASU No. 2013-01, effective January 1, 2013, had no impact on our consolidated financial condition and results of operations. In July 2012, the FASB issued ASU No. 2012-02, "Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment," which specifies that an entity has the option to first assess qualitative factors to determine whether it is more likely than not that the asset is impaired. Unless an entity determines that it is more likely than not that the fair value of such an asset is less than its carrying amount, it would not need to calculate the fair value of the asset in that year. ASU No. 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The Our
adoption of ASU No. 2012-02, will not have an impact on our consolidated financial condition and results of operations. In January 2013, the FASB issued ASU No. 2013-01, "Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities," which limits the scope of ASU 2011-11 to derivatives, repurchase agreements and securities lending transactions to the extent that they are (1) offset in the financial statements or (2) subject to an enforceable master netting arrangement or similar agreement. ASU No. 2013-01 is effective for fiscal years, and interim period within those years, beginning on or after January 1, 2013. The disclosure requirements shall be applied retrospectively for all periods presented. The adoption of ASU No. 2013-01 will not have an2013, had no impact on our consolidated financial condition and results of operations.
In February 2013, the FASB issued ASU No. 2013-02, "Comprehensive Income (Topic 220) - Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income," which requires an entity to provide information about the amounts
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
reclassified out of accumulated other comprehensive income. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income, but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts. Our adoption of ASU No. 2013-02, effective January 1, 2013, had no impact on our consolidated financial condition and results of operations. In March 2013, the FASB issued ASU No. 2013-05, "Foreign Currency Matters (Topic 830) - Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity," which specifies that a cumulative translation adjustment should be released into earning when an entity ceases to have a controlling financial interest in a subsidiary or group of assets within a consolidated foreign entity and the sale or transfer results in the complete or substantially complete liquidation of the foreign entity. ASU No. 2013-05 is effective prospectively for fiscal years, and interim periodperiods within those years, beginning on or after December 15, 2013. We early adopted this ASU effective January 1, 2013 and it did not have a material impact on our consolidated financial condition and results of operations. In July 2013, the FASB issued ASU No. 2013-10, "Derivatives and Hedging (Topic 815) - Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes," which allows the use of the Fed Funds Effective Swap Rate as a U.S. benchmark interest rate for fair value and cash flow hedges under Topic 815, in addition to interest rates on direct Treasury obligations of the U.S. government and the London Interbank Offered Rate swap rate. This ASU also removes the restriction on using different benchmark rates for similar hedges. ASU No. 2013-10 is effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. Our adoption of ASU No. 2013-10 did not have a material impact on our consolidated financial condition and results of operations. Pronouncements Not Yet Implemented In February 2013, the FASB issued ASU No. 2013-04, "Liabilities (Topic 405) - Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date," which requires a reporting entity that is jointly and severally liable to measure the obligation as the sum of the amount the entity has agreed with co-obligors to pay and any additional amount it expects to pay on behalf of one or more co-obligors. The scope of this ASU excludes obligations addressed by existing guidance. ASU No. 2013-04 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2012.2013. The ASU shall be applied retrospectively for arrangements existing at the beginning of the year of adoption. Our adoption of ASU No. 2013-022013-04 will not have an impact on our consolidated financial condition and results of operations. In April 2013, the FASB issued ASU No. 2013-07, "Presentation of Financial Statements (Topic 205) - Liquidation Basis of Accounting," which requires an entity to prepare its financial statements using the liquidation basis of accounting when liquidation is imminent. Liquidation is imminent when the likelihood is remote that the entity will return from liquidation and either (a) a plan for liquidation is approved by the person or persons with the authority to make such a plan effective and the likelihood is remote that the execution of the plan will be blocked by other parties or (b) a plan for liquidation is being imposed by other forces (for example, involuntary bankruptcy). ASU No. 2013-07 is effective for entities that determine liquidation is imminent during annual reporting periods beginning after December 15, 2013, and interim reporting periods therein. The ASU shall be applied prospectively from the day that liquidation becomes imminent. Our adoption of ASU No. 2013-07 will not have an impact on our consolidated financial condition and results of operations. In July 2013, the FASB issued ASU No. 2013-11, "Income Taxes (Topic 740) - Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists," which provides guidance on the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. ASU No. 2013-11 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The ASU shall be applied prospectively to all unrecognized tax benefits that exist at the effective date. The adoption of ASU No. 2013-11 will not have a material impact on our consolidated financial condition and results of operations.
| | 2. | ACQUISITIONS AND EXIT OF JOINT VENTURE |
Innovative Mag-Drive, LLC On December 10, 2013, we acquired for inclusion in Industrial Product Division ("IPD"), 100% of Innovative Mag-Drive, LLC ("Innomag"), a privately-owned, U.S.-based company specializing in advanced sealless magnetic drive centrifugal pumps for the chemical and general industries, in an asset purchase up to $78.7 million in cash, subject to final adjustments. Of the total purchase price, $66.7 million was paid at closing and $0.8 million represents a preliminary working capital adjustment. The remaining $11.2 million of the total purchase price is contingent upon Innomag achieving certain performance metrics during the two- and five-year periods following the acquisition, and to the extent achieved, is expected to be paid in cash within four months of the performance measurement dates. We initially recorded a liability of $7.5 million as an estimate of the acquisition date fair value of the contingent consideration, which is based on the weighted probability of achievement of the performance metrics as of the date of the acquisition. Innomag generated approximately $17 million in sales (unaudited) during its fiscal year ended December 31, 2012. The preliminary purchase price was allocated to the assets acquired and liabilities assumed based on estimates of fair values at the date of acquisition and is summarized below: | | | | | | (Amounts in millions) | Current assets | $ | 8.1 |
| Property, plant and equipment | 5.3 |
| Intangible assets | 18.5 |
| Current liabilities | (0.8 | ) | Net tangible and intangible assets | 31.1 |
| Goodwill | 43.9 |
| Preliminary purchase price | $ | 75.0 |
|
The excess of the acquisition date fair value of the total purchase price over the estimated fair value of the net tangible and intangible assets was recorded as goodwill. Goodwill represents the value expected to be obtained from the ability to be more competitive through the offering of a more complete pump product portfolio and from leveraging our current sales, distribution and service network. The goodwill related to this acquisition is recorded in the IPD segment. Upon acquisition, both know-how and existing customer relationships each represented approximately $7 million of the intangible assets acquired. Know-how and exisiting customer relationships both had an expected weighted average useful life of ten years. Total amortizable intangible assets had an expected weighted average useful life of ten years. Subsequent to December 10, 2013, the revenues and expenses of Innomag have been included in our consolidated statements of income. No pro forma information has been provided due to immateriality. Audco India, Limited Effective March 28, 2013, we and our joint venture partner agreed to exit our joint venture, Audco India, Limited (“AIL”), which manufactures integrated industrial valves in India. To effect the exit, in two separate transactions, Flow Control Division ("FCD") acquired 100% ownership of AIL's plug valve manufacturing business in an asset purchase for cash of $10.1 million and sold its 50% equity interest in AIL to the joint venture partner for $46.2 million in cash. We remeasured to fair value our previously held equity interest in the purchased net assets of the plug valve manufacturing business resulting in net assets acquired of approximately $25 million and a pre-tax gain of $15.3 million. The sale of our equity interest in AIL resulted in a pre-tax gain of $13.0 million. Both of the above gains were recorded in net earnings from affiliates in the consolidated statements of income. No pro forma information has been provided due to immateriality. Prior to these transactions, our 50% interest in AIL was recorded using the equity method of accounting. Lawrence Pumps, Inc. Effective October 28, 2011, we acquired for inclusion in the Engineered Product Division ("EPD"), 100% of Lawrence Pumps, Inc. ("LPI"), a privately-owned, U.S.-based pump manufacturer. The final purchase price of $88.2 million reflects immaterial adjustments to goodwill and current liabilities during 2012. LPI specializes in the design, development and manufacture of engineered centrifugal slurry pumps for critical services within the petroleum refining, petrochemical, pulp and paper and energy markets. Under the terms of the purchase agreement, we deposited $1.5 million into escrow to be held and applied against any breach of representations, warranties or indemnities for 24 months. Additionally, we have the right to make indemnification claims up to 15% of the purchase price for 18 months. At the expiration of the escrow period, any residual amounts shall be released to the sellers in satisfaction of the purchase price.
The purchase price was allocated to the assets acquired and liabilities assumed based on estimates of fair values at the date of acquisition and is summarized below: | | | | | | (Amounts in millions) | Current assets | $ | 28.0 |
| Property, plant and equipment | 8.9 |
| Intangible assets | 30.0 |
| Current liabilities | (16.8 | ) | Net tangible and intangible assets | 50.1 |
| Goodwill | 38.1 |
| Purchase price | $ | 88.2 |
|
The excess of the acquisition date fair value of the total purchase price over the estimated fair value of the net tangible and intangible assets was recorded as goodwill. Goodwill represents the value expected to be obtained from the ability to be more competitive through the offering of a more complete pump product portfolio and from leveraging our current sales, distribution and service network. LPI products have proprietary niche applications that strategically complement our product portfolio. The goodwill related to this acquisition is recorded in the EPD segment and is not expected to be deductible for tax purposes.segment. Upon acquisition, existing customer relationships represent approximately $16 million of the intangible assets acquired and had an expected weighted average useful life of ten years. Total amortizable intangible assets had an expected weighted average useful life of ten years. Subsequent to October 28, 2011, the revenues and expenses of LPI have been included in our consolidated statements of income. No pro forma information has been provided due to immateriality. LPI generated approximately $44 million in sales during its fiscal year ended December 31, 2010. Valbart Srl
Effective July 16, 2010, we acquired for inclusion in Flow Control Division ("FCD"), 100% of Valbart Srl ("Valbart"), a privately-owned Italian valve manufacturer, in a share purchase for cash of $199.4 million, which included $33.8 million of existing Valbart net debt (defined as Valbart’s third party debt less cash on hand) that was repaid at closing. Valbart manufactures trunnion-mounted ball valves used primarily in upstream and midstream oil and gas applications, which enables us to offer a more complete valve product portfolio to our oil and gas project customers. The acquisition included Valbart’s portion of the joint venture with us that we entered into in December 2009 that was not operational during 2010. Under the terms of the purchase agreement, we deposited $5.8 million into escrow to be held and applied against any breach of representations, warranties or indemnities for 30 months. At the expiration of the escrow, any residual amounts shall be released to the sellers in satisfaction of the purchase price.
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The excess of the acquisition date fair value of the total purchase price over the estimated fair value of the net tangible and intangible assets was recorded as goodwill. Goodwill represents the value expected to be obtained from the ability to be more competitive through the offering of a more complete valve product portfolio and from leveraging our sales, distribution and service network. The goodwill related to this acquisition is recorded in the FCD segment and is not expected to be deductible for tax purposes. Trademarks are indefinite-lived intangible assets. Upon acquisition, existing customer relationships, non-compete agreements and engineering drawings had expected weighted average useful lives of five years, four years and ten years, respectively. In total, amortizable intangible assets had a weighted average useful life of approximately five years.
Subsequent to July 16, 2010, the revenues and expenses of Valbart have been included in our consolidated statements of income. No pro forma information has been provided due to immateriality.
| | 3. | GOODWILL AND OTHER INTANGIBLE ASSETS |
The changes in the carrying amount of goodwill for the years ended December 31, 20122013 and 20112012 are as follows: | | | EPD | | IPD | | FCD | | Total | EPD | | IPD | | FCD | | Total | | (Amounts in thousands) | (Amounts in thousands) | Balance as of January 1, 2011 | $ | 406,630 |
| | $ | 121,352 |
| | $ | 484,548 |
| | $ | 1,012,530 |
| | Balance as of January 1, 2012 | | $ | 444,431 |
| | $ | 121,244 |
| | $ | 479,402 |
| | $ | 1,045,077 |
| Acquisition(1) | 39,335 |
| | — |
| | — |
| | 39,335 |
| 1,812 |
| | — |
| | — |
| | 1,812 |
| Dispositions | — |
| | (102 | ) | | — |
| | (102 | ) | | Currency translation | (1,534 | ) | | (6 | ) | | (5,146 | ) | | (6,686 | ) | | Balance as of December 31, 2011 | $ | 444,431 |
| | $ | 121,244 |
| | $ | 479,402 |
| | $ | 1,045,077 |
| | Acquisitions | 1,812 |
| | — |
| | — |
| | 1,812 |
| | Currency translation | 1,317 |
| | 162 |
| | 5,484 |
| | 6,963 |
| 1,317 |
| | 162 |
| | 5,484 |
| | 6,963 |
| Balance as of December 31, 2012 | $ | 447,560 |
| | $ | 121,406 |
| | $ | 484,886 |
| | $ | 1,053,852 |
| $ | 447,560 |
| | $ | 121,406 |
| | $ | 484,886 |
| | $ | 1,053,852 |
| Acquisition(1) | | — |
| | 43,865 |
| | — |
| | 43,865 |
| Currency translation | | 1,936 |
| | 261 |
| | 7,637 |
| | 9,834 |
| Balance as of December 31, 2013 | | $ | 449,496 |
| | $ | 165,532 |
| | $ | 492,523 |
| | $ | 1,107,551 |
|
| | (1) | Goodwill primarily related to the purchase price adjustments for the acquisition of LPI.LPI in 2012 and the Innomag acquisition in 2013. See Note 2 for additional information. |
The following table provides information about our intangible assets for the years ended December 31, 20122013 and 20112012:
| | | | | December 31, 2012 | | December 31, 2011 | | | December 31, 2013 | | December 31, 2012 | | Useful Life (Years) | | Ending Gross Amount | | Accumulated Amortization | | Ending Gross Amount | | Accumulated Amortization | Useful Life (Years) | | Ending Gross Amount | | Accumulated Amortization | | Ending Gross Amount | | Accumulated Amortization | | (Amounts in thousands, except years) | (Amounts in thousands, except years) | Finite-lived intangible assets: | | | |
| | |
| | |
| | |
| | | |
| | |
| | |
| | |
| Engineering drawings(1) | 10-20 | | $ | 92,760 |
| | $ | (57,252 | ) | | $ | 92,389 |
| | $ | (53,404 | ) | 10-20 | | $ | 93,687 |
| | $ | (61,401 | ) | | $ | 92,760 |
| | $ | (57,252 | ) | Existing customer relationships(2) | 5-10 | | 32,484 |
| | (10,024 | ) | | 32,188 |
| | (5,468 | ) | 5-10 | | 40,077 |
| | (15,241 | ) | | 32,484 |
| | (10,024 | ) | Patents | 9-16 | | 33,037 |
| | (27,061 | ) | | 33,784 |
| | (25,882 | ) | 9-16 | | 32,963 |
| | (28,013 | ) | | 33,037 |
| | (27,061 | ) | Other | 3-40 | | 30,647 |
| | (23,088 | ) | | 30,166 |
| | (18,253 | ) | 3-50 | | 40,797 |
| | (25,438 | ) | | 30,647 |
| | (23,088 | ) | | | | $ | 188,928 |
| | $ | (117,425 | ) | | $ | 188,527 |
| | $ | (103,007 | ) | | | $ | 207,524 |
| | $ | (130,093 | ) | | $ | 188,928 |
| | $ | (117,425 | ) | Indefinite-lived intangible assets(3) | | | $ | 80,057 |
| | $ | (1,485 | ) | | $ | 79,447 |
| | $ | (1,485 | ) | | | $ | 84,670 |
| | $ | (1,553 | ) | | $ | 80,057 |
| | $ | (1,485 | ) |
| | (1) | Engineering drawings represent the estimated fair value associated with specific acquired product and component schematics. |
| | (2) | Existing customer relationships acquired prior to 2011 had a useful life of five years. |
| | (3) | Accumulated amortization for indefinite-lived intangible assets relates to amounts recorded prior to the implementation date of guidance issued in ASC 350. |
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following schedule outlines actual amortization expense recognized during 20122013 and an estimate of future amortization based upon the finite-lived intangible assets owned at December 31, 20122013: | | | Amortization Expense | Amortization Expense | | (Amounts in thousands) | (Amounts in thousands) | Actual for year ended December 31, 2012 | $ | 15,966 |
| | Estimated for year ending December 31, 2013 | 11,913 |
| | Actual for year ended December 31, 2013 | | $ | 12,801 |
| Estimated for year ending December 31, 2014 | 11,845 |
| 13,827 |
| Estimated for year ending December 31, 2015 | 9,061 |
| 10,764 |
| Estimated for year ending December 31, 2016 | 6,688 |
| 9,204 |
| Estimated for year ending December 31, 2017 | 6,515 |
| 8,161 |
| Estimated for year ending December 31, 2018 | | 8,025 |
| Thereafter | 25,481 |
| 27,450 |
|
Amortization expense for finite-lived intangible assets was $16.0 million in 2012 and $14.2 million in 2011 and $10.8 million in 2010.2011.
Inventories, net consisted of the following: | | | December 31, | December 31, | | 2012 | | 2011 | 2013 | | 2012 | | (Amounts in thousands) | (Amounts in thousands) | Raw materials | $ | 351,705 |
| | $ | 329,120 |
| $ | 356,899 |
| | $ | 351,705 |
| Work in process | 798,662 |
| | 793,053 |
| 786,664 |
| | 798,662 |
| Finished goods | 288,160 |
| | 279,267 |
| 306,765 |
| | 288,160 |
| Less: Progress billings | (275,611 | ) | | (320,934 | ) | (304,395 | ) | | (275,611 | ) | Less: Excess and obsolete reserve | (76,253 | ) | | (72,127 | ) | (85,263 | ) | | (76,253 | ) | Inventories, net | $ | 1,086,663 |
| | $ | 1,008,379 |
| $ | 1,060,670 |
| | $ | 1,086,663 |
|
During 20122013, 20112012 and 20102011, we recognized expenses of $18.224.4 million, $16.518.2 million and $10.116.5 million, respectively, for excess and obsolete inventory. These expenses are included in cost of sales ("COS") in our consolidated statements of income.
| | 5. | STOCK-BASED COMPENSATION PLANS |
We establishedmaintain the Flowserve Corporation Equity and Incentive Compensation Plan (the "2010 Plan"), effective January 1, 2010. Thiswhich is a shareholder-approved plan authorizesauthorizing the issuance of up to 2,900,0008,700,000 shares of our common stock in the form of incentive stock options, non-statutory stock options, Restricted Shares,restricted shares, restricted share units and performance-based units (collectively referred to as "Restricted Shares"), stock appreciation rights and bonus stock. Of the 2,900,0008,700,000 shares of common stock authorized under the 2010 Plan, 2,171,8835,676,596 were available for issuance as of December 31, 20122013. In addition to the 2010 Plan, we also maintain the Flowserve Corporation 2004 Stock Compensation Plan (the “2004 Plan”"2004 Plan"), which was established on April 21, 2004. The 2004 Plan authorizes the issuance of up to 3,500,00010,500,000 shares of common stock through grants of Restricted Shares, stock options and other equity-based awards. Of the 3,500,00010,500,000 shares of common stock authorized under the 2004 Plan, 275,945827,835 were available for issuance as of December 31, 20122013. No stock options have been granted since 2006.
Stock Options — Options granted to officers, other employees and directors allow for the purchase of common shares at the market value of our stock on the date the options are granted. Generally, options, whether granted under the 2004 Plan or other previously approved plans,Options generally become exercisable over a staggered period ranging from one to five years (most typically from one to three years). At December 31, 20122013, all outstanding options were fully vested. Options generally expire 10 years from the date of the grant or within a short period of time following the termination of employment or cessation of services by an option holder. No options were granted during 20122013, 20112012 or 20102011. Information related to stock options issued to officers, other employees and directors prior to 2010 under all plans is presented in the following table:
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | 2012 | | 2011 | | 2010 | 2013 | | 2012 | | 2011 | | Shares | | Weighted Average Exercise Price | | Shares | | Weighted Average Exercise Price | | Shares | | Weighted Average Exercise Price | Shares | | Weighted Average Exercise Price | | Shares | | Weighted Average Exercise Price | | Shares | | Weighted Average Exercise Price | Number of shares under option: | |
| | |
| | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
| | |
| | |
| Outstanding — beginning of year | 48,446 |
| | $ | 41.71 |
| | 68,071 |
| | $ | 40.48 |
| | 206,815 |
| | $ | 42.58 |
| 115,362 |
| | $ | 15.00 |
| | 145,338 |
| | $ | 13.90 |
| | 204,213 |
| | $ | 13.49 |
| Exercised | (8,192 | ) | | 30.46 |
| | (19,625 | ) | | 37.44 |
| | (137,244 | ) | | 43.89 |
| (17,400 | ) | | 5.91 |
| | (24,576 | ) | | 10.15 |
| | (58,875 | ) | | 12.48 |
| Canceled | (1,800 | ) | | 22.94 |
| | — |
| | — |
| | (1,500 | ) | | 17.81 |
| — |
| | — |
| | (5,400 | ) | | 7.65 |
| | — |
| | — |
| Outstanding — end of year | 38,454 |
| | $ | 44.99 |
| | 48,446 |
| | $ | 41.71 |
| | 68,071 |
| | $ | 40.48 |
| 97,962 |
| | $ | 16.61 |
| | 115,362 |
| | $ | 15.00 |
| | 145,338 |
| | $ | 13.90 |
| Exercisable — end of year | 38,454 |
| | $ | 44.99 |
| | 48,446 |
| | $ | 41.71 |
| | 68,071 |
| | $ | 40.48 |
| 97,962 |
| | $ | 16.61 |
| | 115,362 |
| | $ | 15.00 |
| | 145,338 |
| | $ | 13.90 |
|
Additional information relating to the ranges of options outstanding at December 31, 20122013, is as follows: | | | | | | | | | | | Weighted Average Remaining Contractual Life | | Options Outstanding and Exercisable | Range of Exercise Prices per Share | | Number Outstanding | | Weighted Average Exercise Price per Share | $12.12 — $18.18 | 0.30 | | 1,700 |
| | $ | 14.29 |
| $18.19 — $24.24 | 0.54 | | 4,100 |
| | 19.15 |
| $24.25 — $42.41 | 2.53 | | 3,500 |
| | 30.95 |
| $42.42 — $48.48 | 3.12 | | 1,067 |
| | 48.17 |
| $48.49 — $54.54 | 3.95 | | 28,087 |
| | 52.25 |
| | | | 38,454 |
| | $ | 44.99 |
|
| | | | | | | | | | | Weighted Average Remaining Contractual Life | | Options Outstanding and Exercisable | Range of Exercise Prices per Share | | Number Outstanding | | Weighted Average Exercise Price per Share | $ 8.08 - $14.14 | 1.53 | | 10,500 |
| | $ | 10.32 |
| $14.15 - $16.16 | 2.12 | | 3,201 |
| | 16.06 |
| $16.17 - $18.18 | 2.95 | | 84,261 |
| | 17.42 |
| | | | 97,962 |
| | $ | 16.61 |
|
As of December 31, 20122013, we had no unrecognized compensation cost related to outstanding stock option awards. The weighted average remaining contractual life of options outstanding at December 31, 20122013 and 20112012 was 3.32.8 years and 3.73.3 years, respectively. The total intrinsic value of stock options exercised during the years ended December 31, 20122013, 20112012 and 20102011 was$0.8 million, $0.7 million $1.5 million and $8.61.5 million, respectively. No stock options vested during the years ended December 31, 20122013, 20112012 and 2010.2011. Restricted Shares — Generally, the restrictions on Restricted Shares do not expire for a minimum of one year and a maximum of three years, and shares are subject to forfeiture during the restriction period. Most typically, Restricted Share grants have staggered vesting periods over one to three years from grant date. The intrinsic value of the Restricted Shares, which is typically the product of share price at the date of grant and the number of Restricted Shares granted, is amortized on a straight-line basis to compensation expense over the periods in which the restrictions lapse.
Unearned compensation is amortized to compensation expense over the vesting period of the Restricted Shares. As of December 31, 20122013 and 20112012, we had $30.431.5 million and $27.030.4 million, respectively, of unearned compensation cost related to unvested Restricted Shares, which is expected to be recognized over a weighted-average period of approximately one year. These amounts will be recognized into net earnings in prospective periods as the awards vest. The total fair value of Restricted Shares vested during the years ended December 31, 20122013, 20112012 and 20102011 was$34.9 million, $36.4 million $35.1 million and $31.935.1 million, respectively. We recorded stock-based compensation for restricted shares as follows: | | | Year Ended December 31, | Year Ended December 31, | | 2012 | | 2011 | 2010 | 2013 | | 2012 | 2011 | | (Amounts in millions) | (Amounts in millions) | Stock-based compensation expense | $35.4 | | $32.1 | | $32.4 | $ | 35.8 |
| | $ | 35.4 |
| | $ | 32.1 |
| Related income tax benefit | (12.0) | | (10.9) | | (10.6) | (12.3) | | (12.0) | | (10.9) | Net stock-based compensation expense | $23.4 | | $21.2 | | $21.8 | $ | 23.5 |
| | $ | 23.4 |
| | $ | 21.2 |
|
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table summarizes information regarding Restricted Shares: | | | Year Ended December 31, 2012 | Year Ended December 31, 2013 | | Shares | | Weighted Average Grant-Date Fair Value | Shares | | Weighted Average Grant-Date Fair Value | Number of unvested Restricted Shares: | |
| | |
| |
| | |
| Outstanding — beginning of year | 1,052,199 |
| | $ | 84.62 |
| 2,376,300 |
| | $ | 37.70 |
| Granted | 375,960 |
| | 116.28 |
| 847,236 |
| | 51.28 |
| Vested | (577,080 | ) | | 63.07 |
| (1,019,540 | ) | | 34.23 |
| Canceled | (58,979 | ) | | 114.88 |
| (183,318 | ) | | 42.84 |
| Outstanding — ending of year | 792,100 |
| | $ | 113.09 |
| 2,020,678 |
| | $ | 44.68 |
|
Unvested Restricted Shares outstanding as of December 31, 20122013, includes approximately 317,000897,000 units with performance-based vesting provisions. Performance-based units are issuable in common stock and vest upon the achievement of pre-defined performance targets, primarily based on our average annual return on net assets over a three-year period as compared with the same measure for a defined peer group for the same period. Most units were granted in three annual grants since January 1, 20102011 and have a vesting percentage between 0% and 200% depending on the achievement of the specific performance targets. Compensation expense is recognized ratably over a cliff-vesting period of 36 months based on the fair market value of our common stock on the date of grant, as adjusted for anticipated forfeitures. During the performance period, earned and unearned compensation expense is adjusted based on changes in the expected achievement of the performance targets. Vesting provisions range from 0 to approximately 627,0001,793,000 shares based on performance targets. As of December 31, 20122013, we estimate vesting of approximately 506,0001,280,000 shares based on expected achievement of performance targets.
| | 6. | DERIVATIVES AND HEDGING ACTIVITIES |
Our risk management and foreign currency derivatives and hedging policy specifies the conditions under which we may enter into derivative contracts. See Note 1 for additional information on our purpose for entering into derivatives not designated as hedging instruments and our overall risk management strategies. We enter intoAll designated hedging instruments are highly effective. Beginning in the fourth quarter of 2013 we elected to designate and apply hedge accounting to certain forward exchange contracts. Forward exchange contracts designated as hedging instruments had a notional value of $6.2 million at December 31, 2013. The fair values of assets and liabilities and any changes in those fair values related to designated forward exchange contracts to hedge our risks associated with transactions denominated in currencies other thanare immaterial for the local currencyperiods presented below. Forward exchange contracts not designated as hedging instruments had notional values of the operation engaging in the transaction.$610.7 million and $608.9 million at December 31, 2013 and 2012, respectively. At December 31, 2012 and 2011, we had $608.9 million and $481.2 million, respectively, of notional amount in outstanding forward exchange contracts with third parties. At December 31, 20122013, the length of forward exchange contracts currently in place ranged from 2 days to 2927 months.
Also as part of our risk management program, we enter into interest rate swap agreements to hedge exposure to floating interest rates on certain portions of our debt. At December 31, 20122013 and 20112012, we had $275.0140.0 million and $330.0275.0 million, respectively, of notional amount in outstanding designated interest rate swaps with third parties. All interest rate swaps are 100% effective. At December 31, 20122013, the maximum remaining length of any interest rate contract in place was approximately 3018 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 forward exchange contracts and interest rate swap agreements and expect all counterparties to meet their obligations. We have not experienced credit losses from our counterparties. The fair value of forward exchange derivative contracts not designated as hedging instruments are summarized below: | | | Year Ended December 31, | Year Ended December 31, | | 2012 | | 2011 | 2013 | | 2012 | | (Amounts in thousands) | (Amounts in thousands) | Current derivative assets | $ | 6,104 |
| | $ | 2,330 |
| $ | 5,215 |
| | $ | 6,104 |
| Noncurrent derivative assets | 104 |
| | 10 |
| 729 |
| | 104 |
| Current derivative liabilities | 7,814 |
| | 11,196 |
| 2,207 |
| | 7,814 |
| Noncurrent derivative liabilities | 12 |
| | 516 |
| 113 |
| | 12 |
|
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The fair value of interest rate swaps in cash flowand forward exchange derivative contracts designated as hedging relationshipsinstruments are summarized below:
| | | Year Ended December 31, | Year Ended December 31, | | 2012 | | 2011 | 2013 | | 2012 | | (Amounts in thousands) | (Amounts in thousands) | Current derivative assets | $ | — |
| | $ | 33 |
| $ | 146 |
| | $ | — |
| Noncurrent derivative assets | — |
| | 71 |
| — |
| | — |
| Current derivative liabilities | 1,417 |
| | 761 |
| 409 |
| | 1,417 |
| Noncurrent derivative liabilities | 316 |
| | 547 |
| 37 |
| | 316 |
|
Current and noncurrent derivative assets are reported in our consolidated balance sheets in prepaid expenses and other and other assets, net, respectively. Current and noncurrent derivative liabilities are reported in our consolidated balance sheets in accrued liabilities and retirement obligations and other liabilities, respectively.
The impact of net changes in the fair values of forward exchange contracts not designated as hedging instruments are summarized below: | | | | | | | | | | | | | | Year Ended December 31, | | 2012 | | 2011 | | 2010 | | (Amounts in thousands) | Loss recognized in income | $ | (7,089 | ) | | $ | (3,655 | ) | | $ | (9,948 | ) |
The impact of net changes in the fair values of interest rate swaps in cash flow hedging relationships are summarized below:
| | | | | | | | | | | | | | Year Ended December 31, | | 2012 | | 2011 | | 2010 | | (Amounts in thousands) | Loss reclassified from accumulated other comprehensive loss into income for settlements, net of tax | $ | (923 | ) | | $ | (1,492 | ) | | $ | (4,215 | ) | Loss recognized in other comprehensive loss, net of tax | (442 | ) | | (1,799 | ) | | (1,392 | ) | Cash flow hedging activity, net of tax | $ | 481 |
| | $ | (307 | ) | | $ | 2,823 |
|
We expect to recognize losses of $1.0 million, $0.5 million and $0.2 million, net of deferred taxes, into earnings in 2013, 2014 and 2015, respectively, related to interest rate swap agreements based on their fair values at December 31, 2012. | | | | | | | | | | | | | | Year Ended December 31, | | 2013 | | 2012 | | 2011 | | (Amounts in thousands) | Loss recognized in income | $ | (4,352 | ) | | $ | (7,089 | ) | | $ | (3,655 | ) |
| | 7. | FAIR VALUE OF FINANCIAL INSTRUMENTS |
Our financial instruments are presented at fair value in our consolidated balance sheets. 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 consolidated balance sheets are categorized 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 and some equity securities. 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 above in Note 6. The fair value measurements of our investments in equity securities are determined using quoted market prices and are classified as Level I. The fair values of our investments in equity securities, and changes thereto, are immaterial to our consolidated financial position and results of operations.
The fair value of our debt, excluding the Senior Notes, as defined below in Note 10, was estimated using interest rates on similar debt recently issued by companies with credit metrics similar to ours and is classified as Level II under the fair value hierarchy. The carrying value of our debt is included in Note 10 and, except for the Senior Notes, approximates fair value. The estimated fair value of our Senior Notes at December 31, 2012 was $502.7 million compared to the carrying value of $498.1 million. The estimated fair value of the Senior Notes is based on Level I quoted market rates. The estimated fair value of our Senior Notes at December 31, 2013 was $763.1 million compared to the carrying value of $796.9 million. The carrying amounts of our other
financial instruments (e.g.(i.e., cash and cash equivalents, accounts receivable, net and accounts payable) approximated fair value due to their short-term nature at December 31, 20122013 and December 31, 20112012.
| | 8. | DETAILS OF CERTAIN CONSOLIDATED BALANCE SHEET CAPTIONS |
The following tables present financial information of certain consolidated balance sheet captions. Accounts Receivable, net — Accounts receivable, net were: | | | December 31, | December 31, | | 2012 | | 2011 | 2013 | | 2012 | | (Amounts in thousands) | (Amounts in thousands) | Accounts receivables | $ | 1,125,215 |
| | $ | 1,080,600 |
| $ | 1,179,400 |
| | $ | 1,125,215 |
| Less: allowance for doubtful accounts | (21,491 | ) | | (20,351 | ) | (24,073 | ) | | (21,491 | ) | Accounts receivable, net | $ | 1,103,724 |
| | $ | 1,060,249 |
| $ | 1,155,327 |
| | $ | 1,103,724 |
|
Property, Plant and Equipment, net — Certain reclassifications have been made to prior period information to conform to current year presentation. Property, plant and equipment, net were: | | | December 31, | December 31, | | 2012 | | 2011 | 2013 | | 2012 | | (Amounts in thousands) | (Amounts in thousands) | Land | $ | 68,134 |
| | $ | 68,685 |
| $ | 79,557 |
| | $ | 68,134 |
| Buildings and improvements | 352,076 |
| | 329,794 |
| 420,364 |
| | 352,076 |
| Machinery, equipment and tooling | 632,921 |
| | 586,304 |
| 694,179 |
| | 632,921 |
| Software, furniture and fixtures and other | 385,912 |
| | 333,955 |
| 372,052 |
| | 385,912 |
| Gross property, plant and equipment | 1,439,043 |
| | 1,318,738 |
| 1,566,152 |
| | 1,439,043 |
| Less: accumulated depreciation | (784,864 | ) | | (719,992 | ) | (849,863 | ) | | (784,864 | ) | Property, plant and equipment, net | $ | 654,179 |
| | $ | 598,746 |
| $ | 716,289 |
| | $ | 654,179 |
|
Accrued Liabilities — Accrued liabilities were: | | | December 31, | December 31, | | 2012 | | 2011 | 2013 | | 2012 | | (Amounts in thousands) | (Amounts in thousands) | Wages, compensation and other benefits | $ | 231,995 |
| | $ | 197,698 |
| $ | 238,238 |
| | $ | 231,995 |
| Commissions and royalties | 34,950 |
| | 33,639 |
| 38,609 |
| | 34,950 |
| Customer advance payments | 405,580 |
| | 358,698 |
| 340,136 |
| | 405,580 |
| Progress billings in excess of accumulated costs | 29,002 |
| | 20,475 |
| 40,718 |
| | 29,002 |
| Warranty costs and late delivery penalties | 61,656 |
| | 70,187 |
| 63,935 |
| | 61,656 |
| Sales and use tax | 17,727 |
| | 11,623 |
| 15,508 |
| | 17,727 |
| Income tax | 39,261 |
| | 21,467 |
| 21,939 |
| | 39,261 |
| Other | 86,422 |
| | 94,814 |
| 101,927 |
| | 86,422 |
| Accrued liabilities | $ | 906,593 |
| | $ | 808,601 |
| $ | 861,010 |
| | $ | 906,593 |
|
"Other" accrued liabilities include professional fees, lease obligations, insurance, interest, freight, restructuring charges, accrued cash dividends payable, legal and environmental matters, derivative liabilities and other items, none of which individually exceed 5% of current liabilities.
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Retirement Obligations and Other Liabilities — Retirement obligations and other liabilities were: | | | December 31, | December 31, | | 2012 | | 2011 | 2013 | | 2012 | | (Amounts in thousands) | (Amounts in thousands) | Pension and postretirement benefits | $ | 233,368 |
| | $ | 190,114 |
| $ | 199,634 |
| | $ | 233,368 |
| Deferred taxes | 65,505 |
| | 47,037 |
| 110,251 |
| | 65,505 |
| Deferred compensation | 9,445 |
| | 7,637 |
| 7,596 |
| | 9,445 |
| Insurance accruals | 10,755 |
| | 10,541 |
| 8,006 |
| | 10,755 |
| Legal and environmental | 24,691 |
| | 31,010 |
| 35,250 |
| | 24,691 |
| Uncertain tax positions | 88,676 |
| | 111,861 |
| 82,689 |
| | 88,676 |
| Other | 24,302 |
| | 24,270 |
| 30,468 |
| | 24,302 |
| Retirement obligations and other liabilities | $ | 456,742 |
| | $ | 422,470 |
| $ | 473,894 |
| | $ | 456,742 |
|
| | 9. | EQUITY METHOD INVESTMENTS |
We occasionally enter into joint venture arrangements with local country partners as our preferred means of entry into countries where barriers to entry may exist. Similar to our consolidated subsidiaries, these unconsolidated joint ventures generally operate within our primary businesses of designing, manufacturing, assembling and distributing fluid motion and control products and services. We have agreements with certain of these joint ventures that restrict us from otherwise entering the respective market and certain joint ventures produce and/or sell our products as part of their broader product offering. Net earnings from investments in unconsolidated joint ventures is reported in net earnings from affiliates in our consolidated statements of income. Given the integrated role of the unconsolidated joint ventures in our business, net earnings from affiliates is presented as a component of operating income. As discussed in Note 2, effective March 28, 2013, we and our joint venture partner agreed to exit our AIL joint venture, a manufacturer of integrated industrial valves in India. Prior to these transactions, our 50% interest was recorded using the equity method of accounting. As of December 31, 20122013, we had investments in eightseven joint ventures (one(one located in each of India, Japan, Saudi Arabia, South Korea Saudi Arabia and the United Arab Emirates and two located in each of China and India)China) that were accounted for using the equity method. Summarized below is combined financial statement information, based on the most recent financial information (unaudited),method and are immaterial for those investments:disclosure purposes. | | | | | | | | | | | | | | Year Ended December 31, | | 2012 | | 2011 | | 2010 | | (Amounts in thousands) | Revenues | $ | 295,473 |
| | $ | 313,059 |
| | $ | 236,285 |
| Gross profit | 83,696 |
| | 94,389 |
| | 77,047 |
| Income before provision for income taxes | 57,467 |
| | 67,098 |
| | 55,217 |
| Provision for income taxes(1) | (16,370 | ) | | (19,609 | ) | | (14,402 | ) | Net income | $ | 41,097 |
| | $ | 47,489 |
| | $ | 40,815 |
|
| | (1) | The provision for income taxes is based on the tax laws and rates in the countries in which our investees operate. The taxation regimes vary not only by their nominal rates, but also by the allowability of deductions, credits and other benefits. |
| | | | | | | | | | December 31, | | 2012 | | 2011 | | (Amounts in thousands) | Current assets | $ | 234,977 |
| | $ | 176,989 |
| Noncurrent assets | 42,270 |
| | 60,694 |
| Total assets | $ | 277,247 |
| | $ | 237,683 |
| Current liabilities | $ | 83,541 |
| | $ | 76,680 |
| Noncurrent liabilities | 5,547 |
| | 4,820 |
| Shareholders’ equity | 188,159 |
| | 156,183 |
| Total liabilities and shareholders’ equity | $ | 277,247 |
| | $ | 237,683 |
|
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Reconciliation of net income per combined income statement information to equity in income from investees per our consolidated statements of income is as follows:
| | | | | | | | | | | | | | Year Ended December 31, | | 2012 | | 2011 | | 2010 | | (Amounts in thousands) | Equity income based on stated ownership percentages | $ | 17,601 |
| | $ | 20,782 |
| | $ | 17,253 |
| Adjustments due to currency translation, U.S. GAAP conformity, taxes on dividends and other adjustments | (649 | ) | | (1,671 | ) | | (604 | ) | Net earnings from affiliates | $ | 16,952 |
| | $ | 19,111 |
| | $ | 16,649 |
|
Our investments in unconsolidated affiliates were $84.0 million and $70.3 million as of December 31, 2012 and 2011, respectively, recorded in other assets, net on the balance sheet.
| | 10. | DEBT AND LEASE OBLIGATIONS |
Debt, including capital lease obligations, consisted of: | | | December 31, | December 31, | | 2012 | | 2011 | 2013 | | 2012 | | (Amounts in thousands) | (Amounts in thousands) | 3.50% Senior Notes due September 15, 2022 (net of unamortized discount) | $ | 498,124 |
| | $ | — |
| | Term Loan Facility, interest rate of 1.81% at December 31, 2012 | 395,000 |
| | — |
| | Term Loan, interest rate of 2.58% at December 31, 2011 | — |
| | 475,000 |
| | 4.00% Senior Notes due November 15, 2023, net of unamortized discount | | $ | 298,615 |
| | $ | — |
| 3.50% Senior Notes due September 15, 2022, net of unamortized discount | | 498,289 |
| | 498,124 |
| Term Loan Facility, interest rate of 1.50% and 1.81% at December 31, 2013 and 2012, respectively | | 370,000 |
| | 395,000 |
| Capital lease obligations and other borrowings | 35,470 |
| | 30,216 |
| 33,393 |
| | 35,470 |
| Debt and capital lease obligations | 928,594 |
| | 505,216 |
| 1,200,297 |
| | 928,594 |
| Less amounts due within one year | 59,478 |
| | 53,623 |
| 72,678 |
| | 59,478 |
| Total debt due after one year | $ | 869,116 |
| | $ | 451,593 |
| $ | 1,127,619 |
| | $ | 869,116 |
|
Scheduled maturities of the Senior Credit Facility (as described below), as well as our Senior Notes and other debt, are: | | | Term Loan | | Senior Notes and other debt | | Total | Term Loan | | Senior Notes and other debt | | Total | | (Amounts in thousands) | (Amounts in thousands) | 2013 | $ | 25,000 |
| | $ | 34,478 |
| | $ | 59,478 |
| | 2014 | 40,000 |
| | 992 |
| | 40,992 |
| $ | 40,000 |
| | $ | 32,678 |
| | $ | 72,678 |
| 2015 | 45,000 |
| | — |
| | 45,000 |
| 45,000 |
| | 715 |
| | 45,715 |
| 2016 | 60,000 |
| | — |
| | 60,000 |
| 60,000 |
| | — |
| | 60,000 |
| 2017 | 225,000 |
| | — |
| | 225,000 |
| 60,000 |
| | — |
| | 60,000 |
| 2018 | | 165,000 |
| | — |
| | 165,000 |
| Thereafter | — |
| | 498,124 |
| | 498,124 |
| — |
| | 796,904 |
| | 796,904 |
| Total | $ | 395,000 |
| | $ | 533,594 |
| | $ | 928,594 |
| $ | 370,000 |
| | $ | 830,297 |
| | $ | 1,200,297 |
|
Senior Notes On November 1, 2013 we completed the public offering of $300.0 million in aggregate principal amount of senior notes due November 15, 2023 ("2023 Senior Notes"). The 2023 Senior Notes bear an interest rate of 4.00% per year, payable on May 15 and November 15 of each year, commencing on May 15, 2014. The 2023 Senior Notes were priced at 99.532% of par value, reflecting a discount to the aggregate principal amount. We used a portion of the net proceeds of the 2023 Senior Notes offering to repay amounts outstanding under our revolving credit facility described below. We used the remaining portion of the net proceeds for general corporate purposes, including the acquisition of Innomag described in Note 2. On September 11, 2012, we completed the public offering of $500.0 million in aggregate principal amount of senior notes due September 15, 2022 ("2022 Senior Notes"). The 2022 Senior Notes bear an interest rate of 3.50% per year, payable on March 15 and September 15 of each year, commencing on March 15, 2013.year. The 2022 Senior Notes were priced at 99.615% of par value, reflecting a discount to the aggregate principal amount. We used a portion of the net proceeds of the 2022 Senior Notes offering to repay the $250.0 million outstanding principal balance on the Bridge Loan (described below). We used the remaining portion of the net proceeds for general corporate purposes, including repayment of the outstanding balance on our Revolving Credit Facility and the repurchase of shares of our common stock (as discussed in Note 15). AtWe have the right to redeem the 2022 Senior Notes and 2023 Senior Notes at any time prior to June 15, 2022 we have the right to redeem the Senior Notes,and August 15, 2023, respectively, in whole or in part, at our option, at a redemption price equal to the greater of: (1) 100% of the principal amount of the Senior Notessenior notes being redeemed; or (2) the sum of the present values of the remaining scheduled payments of principal and interest in respect of the Senior Notes being redeemed discounted to the redemption date on a semi-annual basis, at the applicable Treasury Rate plus 30 basis points.points for the 2022 Senior Notes and plus 25 basis points for the 2023 Senior Notes. In addition, at any time on or after June 15, 2022 for the 2022 Senior Notes and August 15, 2023 for the 2023 Senior Notes, we may redeem the Senior Notes at a redemption price equal to 100% of the principal amount of
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
the Senior Notes being redeemed. In each case, we will also pay the accrued and unpaid interest on the principal amount being redeemed to the redemption date. TheBoth the 2022 Senior Notes and 2023 Senior Notes are unsecured and are jointly and severally and fully and unconditionally guaranteed by certain of our 100% owned domestic subsidiaries that are guarantors under our Senior Credit Facility (described below). The guarantees will be automatically and unconditionally released and discharged when: the guarantor subsidiary is sold or sells all of its assets; the requirement for legal or covenant defeasance or to discharge our obligations has been satisfied; or upon the delivery of an officer's certificate to the trustee that such guarantor subsidiary does not guarantee our obligations under our Senior Credit Facility. TheBoth the 2022 Senior Notes and 2023 Senior Notes rank equally in right of payment with all of our other senior unsecured indebtedness.
We used a portion of the net proceeds of the Senior Notes offering to repay the $250.0 million outstanding principal balance on the Bridge Loan (described below). We used the remaining portion of the net proceeds for general corporate purposes, including repayment of the outstanding balance on the Revolving Credit Facility (described below) and the repurchase of shares of our common stock (as discussed in Note 15).
Senior Credit Facility On August 20, 2012,October 4, 2013 we entered into aamended our existing credit agreement with Bank of America, N.A., as swingline lender, letter of credit issuer and administrative agent, and the other lenders party thereto (together, the “Lenders”), providing for term debt and a revolving credit facility. The credit agreement providesthat provided for an aggregate commitment of $1.25 billion, including a $400.0initial $400.0 million term loan facility with a maturity date of August 20, 2017 (“Term Loan Facility”) and an $850.0 milliona revolving credit facility with a maturity date of August 20, 2017 (“Revolving Credit Facility” and, together with the Term Loan Facility, the “Senior Credit Facility”). The significant amendments extended the maturity of our Senior Credit Facility by one year to October 4, 2018, increased the Revolving Credit Facility includes a $300.0from $850.0 million to $1.0 billion and removed the $300.0 million sublimit for the issuance of performance letters of credit. The Revolving Credit Facility retains its $30.0 million sublimit for swing line loans and all other significant existing terms under the credit agreement remained unchanged. As of December 31, 2013 and December 31, 2012, we had no amounts outstanding under the Revolving Credit Facility. We had outstanding letters of credit of $106.1 million and a $152.2 million at December 31, 2013 and December 31, 2012, respectively, which reduced our borrowing capacity to $893.9 million and
$30.0697.8 million, sublimit for swingline loans. Subject respectively. Under the Senior Credit Facility and subject to certain conditions, we have the right to increase the amount of the Term Loan Facility or the Revolving Credit Facility by an aggregate amount not to exceed $250.0 million.$400.0 million. Our obligations under the Senior Credit Facility are guaranteed by certain of our 100% owned domestic subsidiaries. The Lenders have agreed to release suchSuch guarantees are released if we achieve certain credit ratings. We had not achieved these ratings as of December 31, 2012. We used all of the $400.0 million proceeds advanced under the Term Loan Facility, along with approximately $217 million advanced under the Revolving Credit Facility, to repay all outstanding indebtedness under our then-existing term loan and revolving credit facility (“Prior Revolving Credit Facility”) pursuant to our then-existing credit agreement dated as of December 14, 2010, as amended (the “Prior Credit Agreement”). In connection with this repayment, our outstanding letters of credit under the Prior Credit Agreement were transferred to the Revolving Credit Facility, and we terminated the Prior Credit Agreement on August 20, 2012.2013. Future borrowings under the Revolving Credit Facility will be subject to various conditions, including the absence of any default under the Senior Credit Facility.
At December 31, 2012 and December 31, 2011, we had no amounts outstanding under the Revolving Credit Facility or the Prior Revolving Credit Facility, respectively. We had outstanding letters of credit of $152.2 million and $147.4 million at December 31, 2012 and December 31, 2011, respectively, which reduced our borrowing capacity under the Revolving Credit Facility and Prior Revolving Credit Facility to $697.8 million and $352.6 million, respectively.
The Senior Credit Facility contains, among other things, covenants defining our and our subsidiaries' ability to dispose of assets, merge, pay dividends, repurchase or redeem capital stock and indebtedness, incur indebtedness and guarantees, create liens, enter into agreements with negative pledge clauses, make certain investments or acquisitions, enter into transactions with affiliates or engage in any business activity other than our existing business. The Senior Credit Facility requires us to have a maximum permitted leverage ratio of 3.25 times debt to total Consolidated EBITDA (as defined in the Senior Credit Facility) and a minimum interest coverage of 3.25 times Consolidated EBITDA to total interest expense. Our compliance with these financial covenants under the Senior Credit Facility is tested quarterly. We were in compliance with the covenants as of December 31, 20122013. Repayment of Obligations —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 0.225%0.175% during the period ended(per annum) at December 31, 20122013. We made scheduled principal repayments of $5.0 millionunder our Senior CreditTerm Loan Facility and $12.5 million under our Prior Credit Agreement in 2012. We made scheduled principal repayments under our Prior Credit Agreement and previous credit agreement of $25.0 million, and $5.0 million in 2013 and 2012, respectively. We made scheduled principal payments of $12.5 million and $4.325.0 million under our prior credit agreement in 20112012 and 2010,2011, respectively. We have scheduled principal repayments of $5.010.0 million due in each of the next threefour quarters and $10.0 million in the fourth quarter of 20132014 under our Senior CreditTerm Loan Facility. Our Senior Credit Facility bears a floating rate of interest, and we have entered into $275.0140.0 million of notional amount of interest rate swaps at December 31, 20122013 to hedge exposure to floating interest rates.
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Bridge Loan On June 15, 2012, we entered into a loan agreement with JPMorgan Chase Bank, N.A., as administrative agent, and the other lenders party thereto, providing for a term loan with an aggregate commitment of $250.0 million for a term of 364 days (“Bridge Loan”). The proceeds from the Bridge Loan were used to fund our share repurchase program described in Note 15 to our consolidated financial statements included in this Annual Report. The Bridge Loan was repaid in its entirety in the third quarter of 2012 using a portion of the net proceeds from the 2022 Senior Notes offering.
European Letter of Credit FacilitiesFacility On October 30, 2009,Due to the increased capacity and the removal of the performance letters of credit sublimit of the amended Revolving Credit Facility, we entered into a newelected not to renew our 364-day unsecured, committed €125.0 million European Letter of Credit Facility ("European LOC Facility") with an initial commitment, which expired in October 2013, however, the existing letters of €125.0 million.credit remain outstanding and are still bound by the facility's covenants. The European LOC Facility is renewable annually and is used for contingent obligations in respect of surety and performance bonds, bank guarantees and similar obligations with maturities up to five years. We renewed the European LOC Facility in October 2012 for an additional 364-day period and amended certain provisions to conform to those in our Senior Credit Facility and the Senior Notes. We pay fees between 1.00% and 1.35% for utilized capacity and 0.35% for unutilized capacity under our European LOC Facility. We had outstanding letters of credit drawn on the European LOC Facility of €63.1 million ($83.3 million) and €81.0 million ($105.0 million) as of December 31, 2012 and 2011, respectively.
Our ability to issue additional letters of credit under our previous European Letter of Credit Facility ("Old European LOC Facility"), which had a commitment of €110.0 million, expired November 9, 2009. We paid annual and fronting fees of 0.875% and 0.10%, respectively, for letters of credit written against the Old European LOC Facility. We had no outstanding letters of credit written against the Old European LOC Facility as of December 31, 2012 and €12.2 million ($15.8 million) as of December 31, 2011. The available capacity under the European LOC Facility was €61.9 million ($81.7 million) as of December 31, 2012.
Our European letter of credit facilities containfacility's covenants restrictingrestrict the ability of certain foreign subsidiaries to issue debt, incur liens, sell assets, merge, consolidate, make certain investments, pay dividends, enter into agreements with negative pledge clauses or engage in any business activity other than our existing business. The European LOC Facility also incorporates by reference the covenants contained in our Senior Credit Facility. We were in compliance with all covenants under our European LOC Facility as of December 31, 2013.
The remaining outstanding letters of credit will mature over the next five years. We had outstanding letters of credit drawn on the European LOC Facility of €69.6 million ($95.4 million) and €63.1 million ($83.3 million) as of December 31, 2013 and 2012., respectively.
Operating Leases We have non-cancelable operating leases for certain offices, service and quick response centers, certain manufacturing and operating facilities, machinery, equipment and automobiles. Rental expense relating to operating leases was $63.662.3 million, $52.863.6 million and $46.952.8 million in 20122013, 20112012 and 20102011, respectively.
The future minimum lease payments due under non-cancelable operating leases are (amounts in thousands): | | Year Ended December 31, | 2013 | $ | 52,839 |
| | 2014 | 41,422 |
| $ | 54,109 |
| 2015 | 31,816 |
| 42,798 |
| 2016 | 21,782 |
| 32,659 |
| 2017 | 17,181 |
| 25,610 |
| 2018 | | 19,954 |
| Thereafter | 47,127 |
| 47,022 |
| Total minimum lease payments | $ | 212,167 |
| $ | 222,152 |
|
| | 11. | SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION |
On September 11, 2012 and November 1, 2013, we completed a public offeringofferings of Senior Notes that are fully and unconditionally and jointly and severally guaranteed by certain of our 100%owned domestic subsidiaries. In accordance with Rule 3−10 of Regulation S−X promulgated under the Securities Act of 1933, theThe following condensed consolidating financial statements present the financial position, results of operations and cash flows of Flowserve Corporation (referred to as “Parent” for the purpose of this note only) on a Parent−only (Issuer) basis, the combined guarantor subsidiaries on a guarantor−only basis, the combined non-guarantor subsidiaries on a non-guarantor-only basis and elimination adjustments necessary to arrive at the information for the Parent, guarantor subsidiaries and non-guarantor subsidiaries on a condensed consolidated basis. Investments in subsidiaries have been accounted for using the equity method for this presentation.
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
CONDENSED CONSOLIDATING BALANCE SHEETS | | | December 31, 2012 | December 31, 2013 | | Parent (Issuer) | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated Total | Parent (Issuer) | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated Total | (Amounts in thousands) | | | | | | | | | | | | | | | | | | | ASSETS | Current assets: | | | | | | | | | | | | | | | | | | | Cash and cash equivalents | $ | 2,609 |
| | $ | — |
| | $ | 301,643 |
| | $ | — |
| | $ | 304,252 |
| $ | 29,086 |
| | $ | — |
| | $ | 334,718 |
| | $ | — |
| | $ | 363,804 |
| Accounts receivable, net | — |
| | 255,164 |
| | 848,560 |
| | — |
| | 1,103,724 |
| — |
| | 263,594 |
| | 891,733 |
| | — |
| | 1,155,327 |
| Intercompany receivables | — |
| | 157,447 |
| | 42,836 |
| | (200,283 | ) | | — |
| — |
| | 155,422 |
| | 74,089 |
| | (229,511 | ) | | — |
| Inventories, net | — |
| | 382,360 |
| | 704,303 |
| | — |
| | 1,086,663 |
| — |
| | 371,172 |
| | 689,498 |
| | — |
| | 1,060,670 |
| Other current assets | 1,967 |
| | 123,152 |
| | 120,458 |
| | — |
| | 245,577 |
| 1,879 |
| | 144,551 |
| | 121,151 |
| | — |
| | 267,581 |
| Total current assets | 4,576 |
| | 918,123 |
| | 2,017,800 |
| | (200,283 | ) | | 2,740,216 |
| 30,965 |
| | 934,739 |
| | 2,111,189 |
| | (229,511 | ) | | 2,847,382 |
| Property, plant and equipment, net | — |
| | 204,032 |
| | 450,147 |
| | — |
| | 654,179 |
| — |
| | 220,072 |
| | 496,217 |
| | — |
| | 716,289 |
| Goodwill | — |
| | 671,858 |
| | 381,994 |
| | — |
| | 1,053,852 |
| — |
| | 715,722 |
| | 391,829 |
| | — |
| | 1,107,551 |
| Intercompany receivables | 462,500 |
| | 10,363 |
| | 85,316 |
| | (558,179 | ) | | — |
| 432,500 |
| | 9,520 |
| | 186,789 |
| | (628,809 | ) | | — |
| Investment in consolidated subsidiaries | 2,321,597 |
| | 1,604,462 |
| | — |
| | (3,926,059 | ) | | — |
| 2,579,701 |
| | 1,850,998 |
| | — |
| | (4,430,699 | ) | | — |
| Other assets, net | 14,879 |
| | 175,771 |
| | 172,061 |
| | — |
| | 362,711 |
| 15,486 |
| | 211,755 |
| | 138,270 |
| | — |
| | 365,511 |
| Total assets | $ | 2,803,552 |
| | $ | 3,584,609 |
| | $ | 3,107,318 |
| | $ | (4,684,521 | ) | | $ | 4,810,958 |
| $ | 3,058,652 |
| | $ | 3,942,806 |
| | $ | 3,324,294 |
| | $ | (5,289,019 | ) | | $ | 5,036,733 |
| | | | | | | | | | | | | | | | | | | | LIABILITIES AND EQUITY | Current liabilities: | | | | | | | | | | | | | | | | | | | Accounts payable | $ | — |
| | $ | 158,028 |
| | $ | 458,872 |
| | $ | — |
| | $ | 616,900 |
| $ | — |
| | $ | 163,254 |
| | $ | 448,838 |
| | $ | — |
| | $ | 612,092 |
| Intercompany payables | 35 |
| | 42,801 |
| | 157,447 |
| | (200,283 | ) | | — |
| 81 |
| | 74,008 |
| | 155,422 |
| | (229,511 | ) | | — |
| Accrued liabilities | 11,610 |
| | 314,162 |
| | 580,821 |
| | — |
| | 906,593 |
| 12,874 |
| | 293,012 |
| | 555,124 |
| | — |
| | 861,010 |
| Debt due within one year | 25,000 |
| | 5 |
| | 34,473 |
| | — |
| | 59,478 |
| 40,000 |
| | 5 |
| | 32,673 |
| | — |
| | 72,678 |
| Deferred taxes | — |
| | — |
| | 7,654 |
| | — |
| | 7,654 |
| — |
| | — |
| | 12,319 |
| | — |
| | 12,319 |
| Total current liabilities | 36,645 |
| | 514,996 |
| | 1,239,267 |
| | (200,283 | ) | | 1,590,625 |
| 52,955 |
| | 530,279 |
| | 1,204,376 |
| | (229,511 | ) | | 1,558,099 |
| Long-term debt due after one year | 868,124 |
| | 20 |
| | 972 |
| | — |
| | 869,116 |
| 1,126,904 |
| | — |
| | 715 |
| | — |
| | 1,127,619 |
| Intercompany payables | 1,144 |
| | 546,672 |
| | 10,363 |
| | (558,179 | ) | | — |
| 1,144 |
| | 618,145 |
| | 9,520 |
| | (628,809 | ) | | — |
| Retirement obligations and other liabilities | 7,420 |
| | 201,324 |
| | 247,998 |
| | — |
| | 456,742 |
| 7,270 |
| | 214,681 |
| | 251,943 |
| | — |
| | 473,894 |
| Total liabilities | 913,333 |
| | 1,263,012 |
| | 1,498,600 |
| | (758,462 | ) | | 2,916,483 |
| 1,188,273 |
| | 1,363,105 |
| | 1,466,554 |
| | (858,320 | ) | | 3,159,612 |
| Total Flowserve Corporation shareholders’ equity | 1,890,219 |
| | 2,321,597 |
| | 1,604,462 |
| | (3,926,059 | ) | | 1,890,219 |
| 1,870,379 |
| | 2,579,701 |
| | 1,850,998 |
| | (4,430,699 | ) | | 1,870,379 |
| Noncontrolling interests | — |
| | — |
| | 4,256 |
| | — |
| | 4,256 |
| — |
| | — |
| | 6,742 |
| | — |
| | 6,742 |
| Total equity | 1,890,219 |
| | 2,321,597 |
| | 1,608,718 |
| | (3,926,059 | ) | | 1,894,475 |
| 1,870,379 |
| | 2,579,701 |
| | 1,857,740 |
| | (4,430,699 | ) | | 1,877,121 |
| Total liabilities and equity | $ | 2,803,552 |
| | $ | 3,584,609 |
| | $ | 3,107,318 |
| | $ | (4,684,521 | ) | | $ | 4,810,958 |
| $ | 3,058,652 |
| | $ | 3,942,806 |
| | $ | 3,324,294 |
| | $ | (5,289,019 | ) | | $ | 5,036,733 |
|
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | December 31, 2011 | December 31, 2012 | | Parent (Issuer) | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated Total | Parent (Issuer) | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated Total | (Amounts in thousands) | | | | | | | | | | | | | | | | | | | ASSETS | Current assets: | | | | | | | | | | | | | | | | | | | Cash and cash equivalents | $ | 150,308 |
| | $ | — |
| | $ | 187,048 |
| | $ | — |
| | $ | 337,356 |
| $ | 2,609 |
| | $ | — |
| | $ | 301,643 |
| | $ | — |
| | $ | 304,252 |
| Accounts receivable, net | — |
| | 271,571 |
| | 788,678 |
| | — |
| | 1,060,249 |
| — |
| | 255,164 |
| | 848,560 |
| | — |
| | 1,103,724 |
| Intercompany receivables | — |
| | 118,292 |
| | 33,883 |
| | (152,175 | ) | | — |
| — |
| | 157,447 |
| | 42,836 |
| | (200,283 | ) | | — |
| Inventories, net | — |
| | 357,870 |
| | 650,509 |
| | — |
| | 1,008,379 |
| — |
| | 382,360 |
| | 704,303 |
| | — |
| | 1,086,663 |
| Other current assets, net | 1,530 |
| | 94,413 |
| | 126,427 |
| | — |
| | 222,370 |
| 1,967 |
| | 123,152 |
| | 120,458 |
| | — |
| | 245,577 |
| Total current assets | 151,838 |
| | 842,146 |
| | 1,786,545 |
| | (152,175 | ) | | 2,628,354 |
| 4,576 |
| | 918,123 |
| | 2,017,800 |
| | (200,283 | ) | | 2,740,216 |
| Property, plant and equipment, net | — |
| | 194,671 |
| | 404,075 |
| | — |
| | 598,746 |
| — |
| | 204,032 |
| | 450,147 |
| | — |
| | 654,179 |
| Goodwill | — |
| | 673,013 |
| | 372,064 |
| | — |
| | 1,045,077 |
| — |
| | 671,858 |
| | 381,994 |
| | — |
| | 1,053,852 |
| Intercompany receivables | 475,000 |
| | 14,697 |
| | 1,144 |
| | (490,841 | ) | | — |
| 462,500 |
| | 10,363 |
| | 85,316 |
| | (558,179 | ) | | — |
| Investment in consolidated subsidiaries | 2,122,734 |
| | 1,336,856 |
| | — |
| | (3,459,590 | ) | | — |
| 2,321,597 |
| | 1,604,462 |
| | — |
| | (3,926,059 | ) | | — |
| Other assets, net | 10,039 |
| | 184,855 |
| | 155,543 |
| | — |
| | 350,437 |
| 14,879 |
| | 175,771 |
| | 172,061 |
| | — |
| | 362,711 |
| Total assets | $ | 2,759,611 |
| | $ | 3,246,238 |
| | $ | 2,719,371 |
| | $ | (4,102,606 | ) | | $ | 4,622,614 |
| $ | 2,803,552 |
| | $ | 3,584,609 |
| | $ | 3,107,318 |
| | $ | (4,684,521 | ) | | $ | 4,810,958 |
| | | | | | | | | | | | | | | | | | | | LIABILITIES AND EQUITY | Current liabilities: | | | | | | | | | | | | | | | | | | | Accounts payable | $ | — |
| | $ | 153,137 |
| | $ | 444,205 |
| | $ | — |
| | $ | 597,342 |
| $ | — |
| | $ | 158,028 |
| | $ | 458,872 |
| | $ | — |
| | $ | 616,900 |
| Intercompany payables | 223 |
| | 33,660 |
| | 118,292 |
| | (152,175 | ) | | — |
| 35 |
| | 42,801 |
| | 157,447 |
| | (200,283 | ) | | — |
| Accrued liabilities | 6,143 |
| | 271,535 |
| | 530,923 |
| | — |
| | 808,601 |
| 11,610 |
| | 314,162 |
| | 580,821 |
| | — |
| | 906,593 |
| Debt due within one year | 25,000 |
| | 5 |
| | 28,618 |
| | — |
| | 53,623 |
| 25,000 |
| | 5 |
| | 34,473 |
| | — |
| | 59,478 |
| Deferred taxes | — |
| | — |
| | 10,755 |
| | — |
| | 10,755 |
| — |
| | — |
| | 7,654 |
| | — |
| | 7,654 |
| Total current liabilities | 31,366 |
| | 458,337 |
| | 1,132,793 |
| | (152,175 | ) | | 1,470,321 |
| 36,645 |
| | 514,996 |
| | 1,239,267 |
| | (200,283 | ) | | 1,590,625 |
| Long-term debt due after one year | 450,000 |
| | 40 |
| | 1,553 |
| | — |
| | 451,593 |
| 868,124 |
| | 20 |
| | 972 |
| | — |
| | 869,116 |
| Intercompany payables | 1,144 |
| | 475,000 |
| | 14,697 |
| | (490,841 | ) | | — |
| 1,144 |
| | 546,672 |
| | 10,363 |
| | (558,179 | ) | | — |
| Retirement obligations and other liabilities | 7,288 |
| | 190,127 |
| | 225,055 |
| | — |
| | 422,470 |
| 7,420 |
| | 201,324 |
| | 247,998 |
| | — |
| | 456,742 |
| Total liabilities | 489,798 |
| | 1,123,504 |
| | 1,374,098 |
| | (643,016 | ) | | 2,344,384 |
| 913,333 |
| | 1,263,012 |
| | 1,498,600 |
| | (758,462 | ) | | 2,916,483 |
| Total Flowserve Corporation shareholders’ equity | 2,269,813 |
| | 2,122,734 |
| | 1,336,856 |
| | (3,459,590 | ) | | 2,269,813 |
| 1,890,219 |
| | 2,321,597 |
| | 1,604,462 |
| | (3,926,059 | ) | | 1,890,219 |
| Noncontrolling interests | — |
| | — |
| | 8,417 |
| | — |
| | 8,417 |
| — |
| | — |
| | 4,256 |
| | — |
| | 4,256 |
| Total equity | 2,269,813 |
| | 2,122,734 |
| | 1,345,273 |
| | (3,459,590 | ) | | 2,278,230 |
| 1,890,219 |
| | 2,321,597 |
| | 1,608,718 |
| | (3,926,059 | ) | | 1,894,475 |
| Total liabilities and equity | $ | 2,759,611 |
| | $ | 3,246,238 |
| | $ | 2,719,371 |
| | $ | (4,102,606 | ) | | $ | 4,622,614 |
| $ | 2,803,552 |
| | $ | 3,584,609 |
| | $ | 3,107,318 |
| | $ | (4,684,521 | ) | | $ | 4,810,958 |
|
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
CONDENSED CONSOLIDATING STATEMENTS OF INCOME AND COMPREHENSIVE INCOME | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, 2013 | | Parent (Issuer) | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated Total | (Amounts in thousands) | | | | | | | | | | Sales | $ | — |
| | $ | 1,952,235 |
| | $ | 3,388,258 |
| | $ | (385,874 | ) | | $ | 4,954,619 |
| Cost of sales | — |
| | (1,281,035 | ) | | (2,371,363 | ) | | 385,874 |
| | (3,266,524 | ) | Gross profit | — |
| | 671,200 |
| | 1,016,895 |
| | — |
| | 1,688,095 |
| Selling, general and administrative expense | (3,079 | ) | | (400,609 | ) | | (563,141 | ) | | — |
| | (966,829 | ) | Net earnings from affiliates | — |
| | 1,175 |
| | 37,842 |
| | — |
| | 39,017 |
| Net earnings from consolidated subsidiaries, net of tax | 505,764 |
| | 345,465 |
| | — |
| | (851,229 | ) | | — |
| Operating income | 502,685 |
| | 617,231 |
| | 491,596 |
| | (851,229 | ) | | 760,283 |
| Interest expense, net | (29,729 | ) | | (11,685 | ) | | (11,568 | ) | | — |
| | (52,982 | ) | Other expense, net | — |
| | (767 | ) | | (13,513 | ) | | — |
| | (14,280 | ) | Earnings before income taxes | 472,956 |
| | 604,779 |
| | 466,515 |
| | (851,229 | ) | | 693,021 |
| Provision for income taxes | 12,574 |
| | (99,015 | ) | | (118,260 | ) | | — |
| | (204,701 | ) | Net earnings, including noncontrolling interests | 485,530 |
| | 505,764 |
| | 348,255 |
| | (851,229 | ) | | 488,320 |
| Less: Net earnings attributable to noncontrolling interests | — |
| | — |
| | (2,790 | ) | | — |
| | (2,790 | ) | Net earnings attributable to Flowserve Corporation | $ | 485,530 |
| | $ | 505,764 |
| | $ | 345,465 |
| | $ | (851,229 | ) | | $ | 485,530 |
| Comprehensive income attributable to Flowserve Corporation | $ | 488,363 |
| | $ | 508,929 |
| | $ | 316,484 |
| | $ | (825,413 | ) | | $ | 488,363 |
|
| | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, 2012 | | Parent (Issuer) | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated Total | (Amounts in thousands) | | | | | | | | | | Sales | $ | — |
| | $ | 1,833,613 |
| | $ | 3,272,519 |
| | $ | (354,793 | ) | | $ | 4,751,339 |
| Cost of sales | — |
| | (1,190,206 | ) | | (2,334,975 | ) | | 354,793 |
| | (3,170,388 | ) | Gross profit | — |
| | 643,407 |
| | 937,544 |
| | — |
| | 1,580,951 |
| Selling, general and administrative expense | (3,571 | ) | | (390,713 | ) | | (527,841 | ) | | — |
| | (922,125 | ) | Net earnings from affiliates | — |
| | 3,855 |
| | 13,097 |
| | — |
| | 16,952 |
| Net earnings from consolidated subsidiaries, net of tax | 456,740 |
| | 309,223 |
| | — |
| | (765,963 | ) | | — |
| Operating income | 453,169 |
| | 565,772 |
| | 422,800 |
| | (765,963 | ) | | 675,778 |
| Interest expense, net | (9,881 | ) | | (19,347 | ) | | (13,338 | ) | | — |
| | (42,566 | ) | Other expense, net | — |
| | (683 | ) | | (20,964 | ) | | — |
| | (21,647 | ) | Earnings before income taxes | 443,288 |
| | 545,742 |
| | 388,498 |
| | (765,963 | ) | | 611,565 |
| Provision for income taxes | 5,051 |
| | (89,002 | ) | | (76,815 | ) | | — |
| | (160,766 | ) | Net earnings, including noncontrolling interests | 448,339 |
| | 456,740 |
| | 311,683 |
| | (765,963 | ) | | 450,799 |
| Less: Net earnings attributable to noncontrolling interests | — |
| | — |
| | (2,460 | ) | | — |
| | (2,460 | ) | Net earnings attributable to Flowserve Corporation | $ | 448,339 |
| | $ | 456,740 |
| | $ | 309,223 |
| | $ | (765,963 | ) | | $ | 448,339 |
| Comprehensive income attributable to Flowserve Corporation | $ | 440,127 |
| | $ | 446,536 |
| | $ | 292,167 |
| | $ | (738,703 | ) | | $ | 440,127 |
|
| | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, 2011 | | Parent (Issuer) | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated Total | (Amounts in thousands) | | | | | | | | | | Sales | $ | — |
| | $ | 1,735,809 |
| | $ | 3,120,802 |
| | $ | (346,410 | ) | | $ | 4,510,201 |
| Cost of sales | — |
| | (1,104,642 | ) | | (2,238,323 | ) | | 346,410 |
| | (2,996,555 | ) | Gross profit | — |
| | 631,167 |
| | 882,479 |
| | — |
| | 1,513,646 |
| Selling, general and administrative expense | (7,236 | ) | | (368,818 | ) | | (538,026 | ) | | — |
| | (914,080 | ) | Net earnings from affiliates | — |
| | 3,819 |
| | 15,292 |
| | — |
| | 19,111 |
| Net earnings from consolidated subsidiaries, net of tax | 434,436 |
| | 272,111 |
| | — |
| | (706,547 | ) | | — |
| Operating income | 427,200 |
| | 538,279 |
| | 359,745 |
| | (706,547 | ) | | 618,677 |
| Interest expense, net | (1,088 | ) | | (18,615 | ) | | (14,897 | ) | | — |
| | (34,600 | ) | Other (expense) income, net | — |
| | (2,858 | ) | | 6,536 |
| | — |
| | 3,678 |
| Earnings before income taxes | 426,112 |
| | 516,806 |
| | 351,384 |
| | (706,547 | ) | | 587,755 |
| Provision for income taxes | 2,470 |
| | (82,370 | ) | | (78,624 | ) | | — |
| | (158,524 | ) | Net earnings, including noncontrolling interests | 428,582 |
| | 434,436 |
| | 272,760 |
| | (706,547 | ) | | 429,231 |
| Less: Net earnings attributable to noncontrolling interests | — |
| | — |
| | (649 | ) | | — |
| | (649 | ) | Net earnings attributable to Flowserve Corporation | $ | 428,582 |
| | $ | 434,436 |
| | $ | 272,111 |
| | $ | (706,547 | ) | | $ | 428,582 |
| Comprehensive income attributable to Flowserve Corporation | $ | 362,991 |
| | $ | 369,193 |
| | $ | 216,653 |
| | $ | (585,846 | ) | | $ | 362,991 |
|
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | Year Ended December 31, 2010 | Year Ended December 31, 2011 | | Parent (Issuer) | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated Total | Parent (Issuer) | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated Total | (Amounts in thousands) | | | | | | | | | | | | | | | | | | | Sales | $ | — |
| | $ | 1,518,779 |
| | $ | 2,805,970 |
| | $ | (292,713 | ) | | $ | 4,032,036 |
| $ | — |
| | $ | 1,735,809 |
| | $ | 3,120,802 |
| | $ | (346,410 | ) | | $ | 4,510,201 |
| Cost of sales | — |
| | (966,167 | ) | | (1,948,889 | ) | | 292,713 |
| | (2,622,343 | ) | — |
| | (1,104,642 | ) | | (2,238,323 | ) | | 346,410 |
| | (2,996,555 | ) | Gross profit | — |
| | 552,612 |
| | 857,081 |
| | — |
| | 1,409,693 |
| — |
| | 631,167 |
| | 882,479 |
| | — |
| | 1,513,646 |
| Selling, general and administrative expense | 458 |
| | (355,139 | ) | | (490,309 | ) | | — |
| | (844,990 | ) | (7,236 | ) | | (368,818 | ) | | (538,026 | ) | | — |
| | (914,080 | ) | Net earnings from affiliates | — |
| | 2,767 |
| | 13,882 |
| | — |
| | 16,649 |
| — |
| | 3,819 |
| | 15,292 |
| | — |
| | 19,111 |
| Net earnings from consolidated subsidiaries, net of tax | 382,515 |
| | 258,712 |
| | — |
| | (641,227 | ) | | — |
| 434,436 |
| | 272,111 |
| | — |
| | (706,547 | ) | | — |
| Operating income | 382,973 |
| | 458,952 |
| | 380,654 |
| | (641,227 | ) | | 581,352 |
| 427,200 |
| | 538,279 |
| | 359,745 |
| | (706,547 | ) | | 618,677 |
| Interest income (expense), net | 16,257 |
| | (34,372 | ) | | (14,611 | ) | | — |
| | (32,726 | ) | | Interest expense, net | | (1,088 | ) | | (18,615 | ) | | (14,897 | ) | | — |
| | (34,600 | ) | Other (expense) income, net | (1,606 | ) | | 2,839 |
| | (19,582 | ) | | — |
| | (18,349 | ) | — |
| | (2,858 | ) | | 6,536 |
| | — |
| | 3,678 |
| Earnings before income taxes | 397,624 |
| | 427,419 |
| | 346,461 |
| | (641,227 | ) | | 530,277 |
| 426,112 |
| | 516,806 |
| | 351,384 |
| | (706,547 | ) | | 587,755 |
| Provision for income taxes | (9,334 | ) | | (44,904 | ) | | (87,358 | ) | | — |
| | (141,596 | ) | 2,470 |
| | (82,370 | ) | | (78,624 | ) | | — |
| | (158,524 | ) | Net earnings, including noncontrolling interests | 388,290 |
| | 382,515 |
| | 259,103 |
| | (641,227 | ) | | 388,681 |
| 428,582 |
| | 434,436 |
| | 272,760 |
| | (706,547 | ) | | 429,231 |
| Less: Net earnings attributable to noncontrolling interests | — |
| | — |
| | (391 | ) | | — |
| | (391 | ) | — |
| | — |
| | (649 | ) | | — |
| | (649 | ) | Net earnings attributable to Flowserve Corporation | $ | 388,290 |
| | $ | 382,515 |
| | $ | 258,712 |
| | $ | (641,227 | ) | | $ | 388,290 |
| $ | 428,582 |
| | $ | 434,436 |
| | $ | 272,111 |
| | $ | (706,547 | ) | | $ | 428,582 |
| Comprehensive income attributable to Flowserve Corporation | $ | 386,812 |
| | $ | 381,438 |
| | $ | 249,035 |
| | $ | (630,473 | ) | | $ | 386,812 |
| $ | 362,991 |
| | $ | 369,193 |
| | $ | 216,653 |
| | $ | (585,846 | ) | | $ | 362,991 |
|
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS | | | Year Ended December 31, 2012 | Year Ended December 31, 2013 | | Parent (Issuer) | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated Total | Parent (Issuer) | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated Total | (Amounts in thousands) | | | | | | | | | | | | | | | | | | | Net cash flows provided by operating activities | $ | 277,076 |
| | $ | 193,819 |
| | $ | 298,616 |
| | $ | (252,381 | ) | | $ | 517,130 |
| $ | 261,741 |
| | $ | 279,594 |
| | $ | 214,066 |
| | $ | (267,642 | ) | | $ | 487,759 |
| Cash flows — Investing activities: | | | | | | | | | |
| | | | | | | | | |
| Capital expenditures | — |
| | (43,600 | ) | | (91,939 | ) | | — |
| | (135,539 | ) | — |
| | (44,380 | ) | | (94,710 | ) | | — |
| | (139,090 | ) | Payments for acquisitions, net of cash acquired | — |
| | — |
| | (3,996 | ) | | — |
| | (3,996 | ) | — |
| | (66,658 | ) | | (10,143 | ) | | — |
| | (76,801 | ) | Intercompany loan proceeds | 12,499 |
| | 32,705 |
| | 54,746 |
| | (99,950 | ) | | — |
| 30,000 |
| | 911 |
| | 72,037 |
| | (102,948 | ) | | — |
| Intercompany loan payments | — |
| | (28,372 | ) | | (138,918 | ) | | 167,290 |
| | — |
| — |
| | (68 | ) | | (173,510 | ) | | 173,578 |
| | — |
| Intercompany capital contribution | — |
| | (483 | ) | | — |
| | 483 |
| | — |
| | Proceeds from disposal of assets | — |
| | 2,268 |
| | 14,665 |
| | — |
| | 16,933 |
| — |
| | 110 |
| | 1,543 |
| | — |
| | 1,653 |
| Affiliate investment activity, net | — |
| | — |
| | (3,825 | ) | | — |
| | (3,825 | ) | | Proceeds from equity investments in affiliates | | — |
| | — |
| | 46,240 |
| | — |
| | 46,240 |
| Net cash flows provided (used) by investing activities | 12,499 |
| | (37,482 | ) | | (169,267 | ) | | 67,823 |
| | (126,427 | ) | 30,000 |
| | (110,085 | ) | | (158,543 | ) | | 70,630 |
| | (167,998 | ) | Cash flows — Financing activities: | | | | | | | | | |
| | | | | | | | | |
| Excess tax benefits from stock-based payment arrangements | — |
| | 8,985 |
| | 2,222 |
| | — |
| | 11,207 |
| — |
| | 8,266 |
| | 1,845 |
| | — |
| | 10,111 |
| Payments on long-term debt | (480,000 | ) | | — |
| | — |
| | — |
| | (480,000 | ) | (25,000 | ) | | — |
| | — |
| | — |
| | (25,000 | ) | Proceeds from issuance of senior notes | 498,075 |
| | — |
| | — |
| | — |
| | 498,075 |
| 298,596 |
| | — |
| | — |
| | — |
| | 298,596 |
| Proceeds from issuance of long-term debt | 400,000 |
| | — |
| | — |
| | — |
| | 400,000 |
| | Proceeds from short-term financing | 475,000 |
| | — |
| | — |
| | — |
| | 475,000 |
| | Payments on short-term financing | (475,000 | ) | | — |
| | — |
| | — |
| | (475,000 | ) | | Net borrowings (payments) under other financing arrangements | 9 |
| | (20 | ) | | 5,818 |
| | — |
| | 5,807 |
| | Borrowings under other financing arrangements, net
| | — |
| | (20 | ) | | (381 | ) | | — |
| | (401 | ) | Repurchases of common shares | (771,942 | ) | | — |
| | — |
| | — |
| | (771,942 | ) | (458,310 | ) | | — |
| | — |
| | — |
| | (458,310 | ) | Payments of dividends | (73,765 | ) | | — |
| | — |
| | — |
| | (73,765 | ) | (76,897 | ) | | — |
| | — |
| | — |
| | (76,897 | ) | Payments of deferred loan costs | (9,901 | ) | | — |
| | — |
| | — |
| | (9,901 | ) | (3,744 | ) | | — |
| | — |
| | — |
| | (3,744 | ) | Intercompany loan proceeds | — |
| | 138,918 |
| | 28,372 |
| | (167,290 | ) | | — |
| — |
| | 173,510 |
| | 68 |
| | (173,578 | ) | | — |
| Intercompany loan payments | — |
| | (67,245 | ) | | (32,705 | ) | | 99,950 |
| | — |
| — |
| | (102,037 | ) | | (911 | ) | | 102,948 |
| | — |
| Intercompany capital contribution | — |
| | — |
| | 483 |
| | (483 | ) | | — |
| | Intercompany dividends | — |
| | (236,975 | ) | | (15,406 | ) | | 252,381 |
| | — |
| — |
| | (249,228 | ) | | (18,414 | ) | | 267,642 |
| | — |
| All other financing, net | 250 |
| | — |
| | (8,653 | ) | | — |
| | (8,403 | ) | 91 |
| | — |
| | (270 | ) | | — |
| | (179 | ) | Net cash flows used by financing activities | (437,274 | ) | | (156,337 | ) | | (19,869 | ) | | 184,558 |
| | (428,922 | ) | (265,264 | ) | | (169,509 | ) | | (18,063 | ) | | 197,012 |
| | (255,824 | ) | Effect of exchange rate changes on cash | — |
| | — |
| | 5,115 |
| | — |
| | 5,115 |
| — |
| | — |
| | (4,385 | ) | | — |
| | (4,385 | ) | Net change in cash and cash equivalents | (147,699 | ) | | — |
| | 114,595 |
| | — |
| | (33,104 | ) | 26,477 |
| | — |
| | 33,075 |
| | — |
| | 59,552 |
| Cash and cash equivalents at beginning of year | 150,308 |
| | — |
| | 187,048 |
| | — |
| | 337,356 |
| 2,609 |
| | — |
| | 301,643 |
| | — |
| | 304,252 |
| Cash and cash equivalents at end of year | $ | 2,609 |
| | $ | — |
| | $ | 301,643 |
| | $ | — |
| | $ | 304,252 |
| $ | 29,086 |
| | $ | — |
| | $ | 334,718 |
| | $ | — |
| | $ | 363,804 |
|
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | Year Ended December 31, 2011 | Year Ended December 31, 2012 | | Parent (Issuer) | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated Total | Parent (Issuer) | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated Total | (Amounts in thousands) | | | | | | | | | | | | | | | | | | | Net cash flows provided by operating activities | $ | 157,811 |
| | $ | 135,303 |
| | $ | 77,557 |
| | $ | (152,458 | ) | | $ | 218,213 |
| $ | 277,076 |
| | $ | 193,819 |
| | $ | 298,616 |
| | $ | (252,381 | ) | | $ | 517,130 |
| Cash flows — Investing activities: | | | | | | | | | |
| | | | | | | | | |
| Capital expenditures | — |
| | (30,138 | ) | | (77,829 | ) | | — |
| | (107,967 | ) | — |
| | (43,600 | ) | | (91,939 | ) | | — |
| | (135,539 | ) | Payments for acquisitions, net of cash acquired | — |
| | (90,505 | ) | | — |
| | — |
| | (90,505 | ) | — |
| | — |
| | (3,996 | ) | | — |
| | (3,996 | ) | Intercompany return of capital | — |
| | 109,432 |
| | — |
| | (109,432 | ) | | — |
| | Intercompany loan proceeds | 25,000 |
| | 28,267 |
| | — |
| | (53,267 | ) | | — |
| 12,499 |
| | 32,705 |
| | 54,746 |
| | (99,950 | ) | | — |
| Intercompany loan payments | | — |
| | (28,372 | ) | | (138,918 | ) | | 167,290 |
| | — |
| Intercompany capital contribution | | — |
| | (483 | ) | | — |
| | 483 |
| | — |
| Proceeds from disposal of assets | — |
| | 130 |
| | 4,139 |
| | — |
| | 4,269 |
| — |
| | 2,268 |
| | 14,665 |
| | — |
| | 16,933 |
| Affiliate investment activity, net | | — |
| | — |
| | (3,825 | ) | | — |
| | (3,825 | ) | Net cash flows provided (used) by investing activities | 25,000 |
| | 17,186 |
| | (73,690 | ) | | (162,699 | ) | | (194,203 | ) | 12,499 |
| | (37,482 | ) | | (169,267 | ) | | 67,823 |
| | (126,427 | ) | Cash flows — Financing activities: | | | | | | | | | |
| | | | | | | | | |
| Excess tax benefits from stock-based payment arrangements | — |
| | 3,963 |
| | 1,705 |
| | — |
| | 5,668 |
| — |
| | 8,985 |
| | 2,222 |
| | — |
| | 11,207 |
| Payments on long-term debt | (25,000 | ) | | — |
| | — |
| | — |
| | (25,000 | ) | (480,000 | ) | | — |
| | — |
| | — |
| | (480,000 | ) | Net (payments) borrowings under other financing arrangements | — |
| | (20 | ) | | 1,601 |
| | — |
| | 1,581 |
| | Proceeds from issuance of senior notes | | 498,075 |
| | — |
| | — |
| | — |
| | 498,075 |
| Proceeds from issuance of long-term debt | | 400,000 |
| | — |
| | — |
| | — |
| | 400,000 |
| Net borrowings (payments) under other financing arrangements | | 9 |
| | (20 | ) | | 5,818 |
| | — |
| | 5,807 |
| Repurchases of common shares | (150,000 | ) | | — |
| | — |
| | — |
| | (150,000 | ) | (771,942 | ) | | — |
| | — |
| | — |
| | (771,942 | ) | Payments of dividends | (69,557 | ) | | — |
| | — |
| | — |
| | (69,557 | ) | (73,765 | ) | | — |
| | — |
| | — |
| | (73,765 | ) | Payment of deferred loan costs | | (9,901 | ) | | — |
| | — |
| | — |
| | (9,901 | ) | Intercompany loan proceeds | | — |
| | 138,918 |
| | 28,372 |
| | (167,290 | ) | | — |
| Intercompany loan payments | — |
| | (25,000 | ) | | (28,267 | ) | | 53,267 |
| | — |
| — |
| | (67,245 | ) | | (32,705 | ) | | 99,950 |
| | — |
| Intercompany distributions of capital | — |
| | — |
| | (109,432 | ) | | 109,432 |
| | — |
| | Intercompany capital contribution | | — |
| | — |
| | 483 |
| | (483 | ) | | — |
| Intercompany dividends | — |
| | (131,432 | ) | | (21,026 | ) | | 152,458 |
| | — |
| — |
| | (236,975 | ) | | (15,406 | ) | | 252,381 |
| | — |
| All other financing, net | 547 |
| | — |
| | (2,195 | ) | | — |
| | (1,648 | ) | 250 |
| | — |
| | (8,653 | ) | | — |
| | (8,403 | ) | Net cash flows used by financing activities | (244,010 | ) |
| (152,489 | ) |
| (157,614 | ) |
| 315,157 |
| | (238,956 | ) | (437,274 | ) |
| (156,337 | ) |
| (19,869 | ) |
| 184,558 |
| | (428,922 | ) | Effect of exchange rate changes on cash | — |
| | — |
| | (5,277 | ) | | — |
| | (5,277 | ) | — |
| | — |
| | 5,115 |
| | — |
| | 5,115 |
| Net change in cash and cash equivalents | (61,199 | ) | | — |
| | (159,024 | ) | | — |
| | (220,223 | ) | (147,699 | ) | | — |
| | 114,595 |
| | — |
| | (33,104 | ) | Cash and cash equivalents at beginning of year | 211,507 |
| | — |
| | 346,072 |
| | — |
| | 557,579 |
| 150,308 |
| | — |
| | 187,048 |
| | — |
| | 337,356 |
| Cash and cash equivalents at end of year | $ | 150,308 |
| | $ | — |
| | $ | 187,048 |
| | $ | — |
| | $ | 337,356 |
| $ | 2,609 |
| | $ | — |
| | $ | 301,643 |
| | $ | — |
| | $ | 304,252 |
|
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | Year Ended December 31, 2010 | Year Ended December 31, 2011 | | Parent (Issuer) | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated Total | Parent (Issuer) | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated Total | (Amounts in thousands) | | | | | | | | | | | | | | | | | | | Net cash flows provided by operating activities | $ | 211,543 |
| | $ | 124,340 |
| | $ | 231,801 |
| | $ | (211,909 | ) | | $ | 355,775 |
| $ | 157,811 |
| | $ | 135,303 |
| | $ | 77,557 |
| | $ | (152,458 | ) | | $ | 218,213 |
| Cash flows — Investing activities: | | | | | | | | | |
| | | | | | | | | |
| Capital expenditures | — |
| | (34,599 | ) | | (67,403 | ) | | — |
| | (102,002 | ) | — |
| | (30,138 | ) | | (77,829 | ) | | — |
| | (107,967 | ) | Payments for acquisitions, net of cash acquired | — |
| | — |
| | (199,396 | ) | | — |
| | (199,396 | ) | — |
| | (90,505 | ) | | — |
| | — |
| | (90,505 | ) | Intercompany return of capital | — |
| | 192,400 |
| | — |
| | (192,400 | ) | | — |
| — |
| | 109,432 |
| | — |
| | (109,432 | ) | | — |
| Intercompany capital contributions | — |
| | (120,000 | ) | | — |
| | 120,000 |
| | — |
| | Intercompany loan proceeds | 44,039 |
| | 177,152 |
| | 349 |
| | (221,540 | ) | | — |
| 25,000 |
| | 28,267 |
| | — |
| | (53,267 | ) | | — |
| Intercompany loan payments | — |
| | (120,000 | ) | | — |
| | 120,000 |
| | — |
| | Proceeds from disposition of assets | — |
| | 8,579 |
| | 2,451 |
| | — |
| | 11,030 |
| | Affiliate investing activity, net | — |
| | — |
| | 3,651 |
| | — |
| | 3,651 |
| | Proceeds from disposal of assets | | — |
| | 130 |
| | 4,139 |
| | — |
| | 4,269 |
| Net cash flows provided (used) by investing activities | 44,039 |
| | 103,532 |
| | (260,348 | ) | | (173,940 | ) | | (286,717 | ) | 25,000 |
| | 17,186 |
| | (73,690 | ) | | (162,699 | ) | | (194,203 | ) | Cash flows — Financing activities: | | | | | | | | | |
| | | | | | | | | |
| Excess tax benefits from stock-based payment arrangements | — |
| | 8,134 |
| | 1,914 |
| | — |
| | 10,048 |
| — |
| | 3,963 |
| | 1,705 |
| | — |
| | 5,668 |
| Payments on long-term debt | (544,016 | ) | | — |
| | — |
| | — |
| | (544,016 | ) | (25,000 | ) | | — |
| | — |
| | — |
| | (25,000 | ) | Proceeds from issuance of long-term debt | 500,000 |
| | — |
| | — |
| | — |
| | 500,000 |
| | Payment of deferred loan costs | (11,596 | ) | | — |
| | — |
| | — |
| | (11,596 | ) | | Repurchases of common shares | (46,015 | ) | | — |
| | — |
| | — |
| | (46,015 | ) | | Payments of dividends | (63,582 | ) | | — |
| | — |
| | — |
| | (63,582 | ) | | Net (payments) proceeds under other financing arrangements | — |
| | (325 | ) | | 2,746 |
| | — |
| | 2,421 |
| — |
| | (20 | ) | | 1,601 |
| | — |
| | 1,581 |
| Intercompany loan proceeds | — |
| | — |
| | 120,000 |
| | (120,000 | ) | | — |
| | Repurchase of common shares | | (150,000 | ) | | — |
| | — |
| | — |
| | (150,000 | ) | Payment of dividends | | (69,557 | ) | | — |
| | — |
| | — |
| | (69,557 | ) | Intercompany loan payments | — |
| | (44,388 | ) | | (177,152 | ) | | 221,540 |
| | — |
| — |
| | (25,000 | ) | | (28,267 | ) | | 53,267 |
| | — |
| Intercompany capital contributions | — |
| | — |
| | 120,000 |
| | (120,000 | ) | | — |
| | Intercompany distributions of capital | — |
| | — |
| | (192,400 | ) | | 192,400 |
| | — |
| — |
| | — |
| | (109,432 | ) | | 109,432 |
| | — |
| Intercompany dividends | — |
| | (191,293 | ) | | (20,616 | ) | | 211,909 |
| | — |
| — |
| | (131,432 | ) | | (21,026 | ) | | 152,458 |
| | — |
| All other financing, net | 5,926 |
| | — |
| | 3,901 |
| | — |
| | 9,827 |
| 547 |
| | — |
| | (2,195 | ) | | — |
| | (1,648 | ) | Net cash flows used by financing activities | (159,283 | ) |
| (227,872 | ) |
| (141,607 | ) |
| 385,849 |
| | (142,913 | ) | (244,010 | ) |
| (152,489 | ) |
| (157,614 | ) |
| 315,157 |
| | (238,956 | ) | Effect of exchange rate changes on cash | — |
| | — |
| | (22,886 | ) | | — |
| | (22,886 | ) | — |
| | — |
| | (5,277 | ) | | — |
| | (5,277 | ) | Net change in cash and cash equivalents | 96,299 |
| | — |
| | (193,040 | ) | | — |
| | (96,741 | ) | (61,199 | ) | | — |
| | (159,024 | ) | | — |
| | (220,223 | ) | Cash and cash equivalents at beginning of year | 115,208 |
| | — |
| | 539,112 |
| | — |
| | 654,320 |
| 211,507 |
| | — |
| | 346,072 |
| | — |
| | 557,579 |
| Cash and cash equivalents at end of year | $ | 211,507 |
| | $ | — |
| | $ | 346,072 |
| | $ | — |
| | $ | 557,579 |
| $ | 150,308 |
| | $ | — |
| | $ | 187,048 |
| | $ | — |
| | $ | 337,356 |
|
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | 12. | PENSION AND POSTRETIREMENT BENEFITS |
We sponsor several noncontributory defined benefit pension plans, covering substantially all U.S. employees and certain non-U.S. employees, which provide benefits based on years of service, age, job grade levels and type of compensation. Retirement benefits for all other covered employees are provided through contributory pension plans, cash balance pension plans and government-sponsored retirement programs. All funded defined benefit pension plans receive funding based on independent actuarial valuations to provide for current service and an amount sufficient to amortize unfunded prior service over periods not to exceed 30 years, with funding falling within the legal limits prescribed by prevailing regulation. We also maintain unfunded defined benefit plans that, as permitted by local regulations, receive funding only when benefits become due. Our defined benefit plan strategy is to ensure that current and future benefit obligations are adequately funded in a cost-effective manner. Additionally, our investing objective is to achieve the highest level of investment performance that is compatible with our risk tolerance and prudent investment practices. Because of the long-term nature of our defined benefit plan liabilities, our funding strategy is based on a long-term perspective for formulating and implementing investment policies and evaluating their investment performance. The asset allocation of our defined benefit plans reflect our decision about the proportion of the investment in equity and fixed income securities, and, where appropriate, the various sub-asset classes of each. At least annually, we complete a comprehensive review of our asset allocation policy and the underlying assumptions, which includes our long-term capital markets rate of return assumptions and our risk tolerances relative to our defined benefit plan liabilities. The expected rates of return on defined benefit plan assets are derived from review of the asset allocation strategy, expected long-term performance of asset classes, risks and other factors adjusted for our specific investment strategy. These rates are impacted by changes in general market conditions, but because they are long-term in nature, short-term market changes do not significantly impact the rates. Our U.S. defined benefit plan assets consist of a balanced portfolio of primarily U.S. equity and fixed income securities. Our non-U.S. defined benefit plan assets include a significant concentration of United Kingdom ("U.K.") equity and fixed income securities. We monitor investment allocations and manage plan assets to maintain acceptable levels of risk. In addition, certain of our defined benefit plans hold investments in European equity and fixed income securities. For all periods presented, we used a measurement date of December 31 for each of our U.S. and non-U.S. pension and postretirement medical plans. U.S. Defined Benefit Plans — We maintain qualified and non-qualified defined benefit pension plans in the U.S. The qualified plan provides coverage for substantially all full-time U.S. employees who receive benefits, up to an earnings threshold specified by the U.S. Department of Labor. The non-qualified plans primarily cover a small number of employees including current and former members of senior management, providing them with benefit levels equivalent to other participants, but that are otherwise limited by U.S. Department of Labor rules. The U.S. plans are designed to operate as "cash balance" arrangements, under which the employee has the option to take a lump sum payment at the end of their service. The total accumulated benefit obligation is equivalent to the total projected benefit obligation ("Benefit Obligation"). The following are assumptions related to the U.S. defined benefit pension plans: | | | Year Ended December 31, | Year Ended December 31, | | 2012 | | 2011 | | 2010 | 2013 | | 2012 | | 2011 | Weighted average assumptions used to determine Benefit Obligations: | |
| | |
| | |
| |
| | |
| | |
| Discount rate | 3.75 | % | | 4.50 | % | | 5.00 | % | 4.50 | % | | 3.75 | % | | 4.50 | % | Rate of increase in compensation levels | 4.25 |
| | 4.25 |
| | 4.25 |
| 4.25 |
| | 4.25 |
| | 4.25 |
| Weighted average assumptions used to determine net pension expense: | | | | | | | | | | | Long-term rate of return on assets | 6.25 | % | | 6.25 | % | | 7.00 | % | 6.00 | % | | 6.25 | % | | 6.25 | % | Discount rate | 4.50 |
| | 5.00 |
| | 5.50 |
| 3.75 |
| | 4.50 |
| | 5.00 |
| Rate of increase in compensation levels | 4.25 |
| | 4.25 |
| | 4.80 |
| 4.25 |
| | 4.25 |
| | 4.25 |
|
At December 31, 20122013 as compared with December 31, 20112012, we decreasedincreased our discount rate from 4.50%3.75% to 3.75%4.50% based on an analysis of publicly-traded investment grade U.S. corporate bonds, which had a lowerhigher yield due to current market conditions.
At December 31, 20122013 as compared with December 31, 20112012 our average assumed rate of compensation increase remained constant at 4.25%. In determining 20122013 expense, the expected rate of return on U.S. plan assets remained consistent with 2011is slightly lower than 2012 at 6.25%6.00%,
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
primarily based on our target allocations and expected long-term asset returns. The long-term rate of return assumption is calculated using a quantitative approach that utilizes unadjusted historical returns and asset allocation as inputs for the calculation. Net pension expense for the U.S. defined benefit pension plans (including both qualified and non-qualified plans) was: | | | Year Ended December 31, | Year Ended December 31, | | 2012 | | 2011 | | 2010 | 2013 | | 2012 | | 2011 | | (Amounts in thousands) | (Amounts in thousands) | Service cost | $ | 21,222 |
| | $ | 19,754 |
| | $ | 20,460 |
| $ | 23,355 |
| | $ | 21,222 |
| | $ | 19,754 |
| Interest cost | 16,458 |
| | 17,217 |
| | 17,941 |
| 15,089 |
| | 16,458 |
| | 17,217 |
| Expected return on plan assets | (21,153 | ) | | (21,692 | ) | | (24,066 | ) | (19,952 | ) | | (21,153 | ) | | (21,692 | ) | Settlement and curtailment of benefits | — |
| | — |
| | 757 |
| (28 | ) | | — |
| | — |
| Amortization of unrecognized prior service benefit | (1,238 | ) | | (1,238 | ) | | (1,239 | ) | (87 | ) | | (1,238 | ) | | (1,238 | ) | Amortization of unrecognized net loss | 12,177 |
| | 10,784 |
| | 9,492 |
| 14,280 |
| | 12,177 |
| | 10,784 |
| U.S. net pension expense | $ | 27,466 |
| | $ | 24,825 |
| | $ | 23,345 |
| $ | 32,657 |
| | $ | 27,466 |
| | $ | 24,825 |
|
The estimated prior service benefit and the estimated net loss for the U.S. defined benefit pension plans that will be amortized from accumulated other comprehensive loss into pension expense in 20132014 is less than $0.10.3 million and $13.88.3 million, respectively. We amortize estimated prior service benefits and estimated net losses over the remaining expected service period. The following summarizes the net pension liabilityasset (liability) for U.S. plans: | | | December 31, | December 31, | | 2012 | | 2011 | 2013 | | 2012 | | (Amounts in thousands) | (Amounts in thousands) | Plan assets, at fair value | $ | 380,342 |
| | $ | 349,986 |
| $ | 410,462 |
| | $ | 380,342 |
| Benefit Obligation | (423,547 | ) | | (387,131 | ) | (405,812 | ) | | (423,547 | ) | Funded status | $ | (43,205 | ) | | $ | (37,145 | ) | $ | 4,650 |
| | $ | (43,205 | ) |
The following summarizes amounts recognized in the balance sheet for U.S. plans: | | | December 31, | December 31, | | 2012 | | 2011 | 2013 | | 2012 | | (Amounts in thousands) | (Amounts in thousands) | Noncurrent assets | | $ | 14,355 |
| | $ | — |
| Current liabilities | $ | (475 | ) | | $ | (346 | ) | (500 | ) | | (475 | ) | Noncurrent liabilities | (42,730 | ) | | (36,799 | ) | (9,205 | ) | | (42,730 | ) | Funded status | $ | (43,205 | ) | | $ | (37,145 | ) | $ | 4,650 |
| | $ | (43,205 | ) |
The following is a summary of the changes in the U.S. defined benefit plans’ pension obligations: | | | 2012 | | 2011 | 2013 | | 2012 | | (Amounts in thousands) | (Amounts in thousands) | Balance — January 1 | $ | 387,131 |
| | $ | 361,766 |
| $ | 423,547 |
| | $ | 387,131 |
| Service cost | 21,222 |
| | 19,754 |
| 23,355 |
| | 21,222 |
| Interest cost | 16,458 |
| | 17,217 |
| 15,089 |
| | 16,458 |
| Actuarial loss | 21,960 |
| | 14,455 |
| | Actuarial (gain) loss | | (22,356 | ) | | 21,960 |
| Benefits paid | (23,224 | ) | | (26,061 | ) | (33,823 | ) | | (23,224 | ) | Balance — December 31 | $ | 423,547 |
| | $ | 387,131 |
| $ | 405,812 |
| | $ | 423,547 |
| Accumulated benefit obligations at December 31 | $ | 423,547 |
| | $ | 387,131 |
| $ | 405,812 |
| | $ | 423,547 |
|
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table summarizes the expected cash benefit payments for the U.S. defined benefit pension plans in the future (amounts in millions): | | 2013 | $ | 34.1 |
| | 2014 | 35.4 |
| $ | 34.4 |
| 2015 | 37.2 |
| 35.5 |
| 2016 | 36.4 |
| 36.7 |
| 2017 | 39.6 |
| 37.7 |
| 2018-2022 | 206.1 |
| | 2018 | | 39.1 |
| 2019-2023 | | 203.7 |
|
The following table shows the change in accumulated other comprehensive loss attributable to the components of the net cost and the change in Benefit Obligations for U.S. plans, net of tax: | | | 2012 | | 2011 | | 2010 | 2013 | | 2012 | | 2011 | | (Amounts in thousands) | (Amounts in thousands) | Balance — January 1 | $ | (98,745 | ) | | $ | (95,258 | ) | | $ | (103,946 | ) | $ | (90,270 | ) | | $ | (98,745 | ) | | $ | (95,258 | ) | Amortization of net loss | 7,605 |
| | 6,718 |
| | 6,063 |
| 8,919 |
| | 7,605 |
| | 6,718 |
| Amortization of prior service benefit | (773 | ) | | (771 | ) | | (791 | ) | (54 | ) | | (773 | ) | | (771 | ) | Net gain (loss) arising during the year | 1,643 |
| | (9,434 | ) | | 3,509 |
| 26,312 |
| | 1,643 |
| | (9,434 | ) | New prior service cost arising during the year | — |
| | — |
| | (93 | ) | | Settlement gain | | (17 | ) | | — |
| | — |
| Balance — December 31 | $ | (90,270 | ) | | $ | (98,745 | ) | | $ | (95,258 | ) | $ | (55,110 | ) | | $ | (90,270 | ) | | $ | (98,745 | ) |
Amounts recorded in accumulated other comprehensive loss consist of: | | | | | | | | | | December 31, | | 2012 | | 2011 | | (Amounts in thousands) | Unrecognized net loss | $ | (89,612 | ) | | $ | (98,869 | ) | Unrecognized prior service (cost) benefit | (658 | ) | | 124 |
| Accumulated other comprehensive loss, net of tax: | $ | (90,270 | ) | | $ | (98,745 | ) |
| | | | | | | | | | December 31, | | 2013 | | 2012 | | (Amounts in thousands) | Unrecognized net loss | $ | (54,391 | ) | | $ | (89,612 | ) | Unrecognized prior service cost | (719 | ) | | (658 | ) | Accumulated other comprehensive loss, net of tax | $ | (55,110 | ) | | $ | (90,270 | ) |
The following is a reconciliation of the U.S. defined benefit pension plans’ assets: | | | 2012 | | 2011 | 2013 | | 2012 | | (Amounts in thousands) | (Amounts in thousands) | Balance — January 1 | $ | 349,986 |
| | $ | 345,710 |
| $ | 380,342 |
| | $ | 349,986 |
| Return on plan assets | 45,716 |
| | 21,466 |
| 39,749 |
| | 45,716 |
| Company contributions | 7,864 |
| | 8,871 |
| 24,194 |
| | 7,864 |
| Benefits paid | (23,224 | ) | | (26,061 | ) | (33,823 | ) | | (23,224 | ) | Balance — December 31 | $ | 380,342 |
| | $ | 349,986 |
| $ | 410,462 |
| | $ | 380,342 |
|
We contributed $7.924.2 million and $8.97.9 million to the U.S. defined benefit pension plans during 20122013 and 20112012, respectively. These payments exceeded the minimum funding requirements mandated by the U.S. Department of Labor rules. Our estimated contribution in 20132014 is expected to be approximately $20 million, excluding direct benefits paid.
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
All U.S. defined benefit plan assets are held by the qualified plan. The asset allocations for the qualified plan at the end of 20122013 and 20112012 by asset category, are as follows: | | | Target Allocation at December 31, | | Percentage of Actual Plan Assets at December 31, | Target Allocation at December 31, | | Percentage of Actual Plan Assets at December 31, | Asset category | 2012 | | 2011 | | 2012 | | 2011 | 2013 | | 2012 | | 2013 | | 2012 | U.S. Large Cap | 28 | % | | 28 | % | | 28 | % | | 28 | % | 19 | % | | 28 | % | | 20 | % | | 28 | % | U.S. Small Cap | 4 | % | | 4 | % | | 4 | % | | 4 | % | 4 | % | | 4 | % | | 4 | % | | 4 | % | International Large Cap | 14 | % | | 14 | % | | 14 | % | | 14 | % | 14 | % | | 14 | % | | 14 | % | | 14 | % | Emerging Markets | 4 | % | | 4 | % | | 4 | % | | 4 | % | 5 | % | | 4 | % | | 5 | % | | 4 | % | World Equity | | 8 | % | | 0 | % | | 8 | % | | 0 | % | Equity securities | 50 | % | | 50 | % | | 50 | % | | 50 | % | 50 | % | | 50 | % | | 51 | % | | 50 | % | Liability Driven Investment | | 40 | % | | 0 | % | | 39 | % | | 0 | % | Long-Term Government / Credit | 21 | % | | 21 | % | | 21 | % | | 21 | % | 10 | % | | 21 | % | | 10 | % | | 21 | % | Intermediate Bond | 29 | % | | 29 | % | | 29 | % | | 29 | % | 0 | % | | 29 | % | | 0 | % | | 29 | % | Fixed income | 50 | % | | 50 | % | | 50 | % | | 50 | % | 50 | % | | 50 | % | | 49 | % | | 50 | % | Other(1) | 0 | % | | 0 | % | | 0 | % | | 0 | % | 0 | % | | 0 | % | | 0 | % | | 0 | % |
| | (1) | Less than 1% of holdings are in the Other category in 2011.2013. |
None of our common stock is directly held by our qualified plan. Our investment strategy is to earn a long-term rate of return consistent with an acceptable degree of risk and minimize our cash contributions over the life of the plan, while taking into account the liquidity needs of the plan. We preserve capital through diversified investments in high quality securities. Our current allocation target is to invest approximately 50% of plan assets in equity securities and 50% in fixed income securities. Within each investment category, assets are allocated to various investment strategies. A professional money management firm manages our assets, and we engage a consultant to assist in evaluating these activities. We periodically review the allocation target, generally in conjunction with an asset and liability study and in consideration of our future cash flow needs. We regularly rebalance the actual allocation to our target investment allocation. Plan assets are invested in commingled funds and the individual funds are actively managed with the intent to outperform specified benchmarks. Our "Pension and Investment Committee" is responsible for setting the investment strategy and the target asset allocation, as well as selecting individual funds. As the qualified plan approached fully funded status, we implemented a Liability-Driven Investing ("LDI") strategy, which more closely aligns the duration of the assets with the duration of the liabilities. AnThe LDI strategy will result in an asset portfolio that more closely matches the behavior of the liability, thereby protecting the funded status of the plan.
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The plan’s financial instruments, shown below, are presented at fair value. See Note 1 for further discussion on how the hierarchical levels of the fair values of the Plan’s investments are determined. The fair values of our U.S. defined benefit plan assets were: | | | At December 31, 2012 | | At December 31, 2011 | At December 31, 2013 | | At December 31, 2012 | | | | Hierarchical Levels | | | | Hierarchical Levels | | | Hierarchical Levels | | | | Hierarchical Levels | | Total | | I | | II | | III | | Total | | I | | II | | III | Total | | I | | II | | III | | Total | | I | | II | | III | | (Amounts in thousands) | | (Amounts in thousands) | (Amounts in thousands) | | (Amounts in thousands) | Cash and cash equivalents | $ | 82 |
| | $ | 82 |
| | $ | — |
| | $ | — |
| | $ | 72 |
| | $ | 72 |
| | $ | — |
| | $ | — |
| $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 82 |
| | $ | 82 |
| | $ | — |
| | $ | — |
| Commingled Funds: | |
| | | | | | | | |
| | | | | | | |
| | | | | | | | |
| | | | | | | Equity securities | |
| | | | | | | | |
| | | | | | | |
| | | | | | | | |
| | | | | | | U.S. Large Cap(a) | 106,886 |
| | — |
| | 106,886 |
| | — |
| | 97,972 |
| | — |
| | 97,972 |
| | — |
| 81,004 |
| | — |
| | 81,004 |
| | — |
| | 106,886 |
| | — |
| | 106,886 |
| | — |
| U.S. Small Cap(b) | 15,368 |
| | — |
| | 15,368 |
| | — |
| | 13,996 |
| | — |
| | 13,996 |
| | — |
| 17,136 |
| | — |
| | 17,136 |
| | — |
| | 15,368 |
| | — |
| | 15,368 |
| | — |
| International Large Cap(c) | 54,159 |
| | — |
| | 54,159 |
| | — |
| | 48,986 |
| | — |
| | 48,986 |
| | — |
| 58,675 |
| | — |
| | 58,675 |
| | — |
| | 54,159 |
| | — |
| | 54,159 |
| | — |
| Emerging Markets(d) | 15,535 |
| | — |
| | 15,535 |
| | — |
| | 13,996 |
| | — |
| | 13,996 |
| | — |
| 19,772 |
| | — |
| | 19,772 |
| | — |
| | 15,535 |
| | — |
| | 15,535 |
| | — |
| World Equity(e) | | 34,069 |
| | — |
| | 34,069 |
| | — |
| | — |
| | — |
| | — |
| | — |
| Fixed income securities | |
| | | | | | | | |
| | | | | | | |
| | | | | | | | |
| | | | | | | Long-Term Government/Credit(e) | 80,567 |
| | — |
| | 80,567 |
| | — |
| | 75,228 |
| | — |
| | 75,228 |
| | — |
| | Intermediate Bond(f) | 107,745 |
| | — |
| | 107,745 |
| | — |
| | 99,721 |
| | — |
| | 99,721 |
| | — |
| | Liability Driven Investment (f) | | 157,638 |
| | — |
| | 157,638 |
| | — |
| | — |
| | — |
| | — |
| | — |
| Long-Term Government/Credit(g) | | 39,308 |
| | — |
| | 39,308 |
| | — |
| | 80,567 |
| | — |
| | 80,567 |
| | — |
| Intermediate Bond(h) | | — |
| | — |
| | — |
| | — |
| | 107,745 |
| | — |
| | 107,745 |
| | — |
| Other types of investments: | |
| | | | | | | | |
| | | | | | | |
| | | | | | | | |
| | | | | | | Other(g) | — |
| | — |
| | — |
| | — |
| | 15 |
| | 15 |
| | — |
| | — |
| | Other(i) | | 2,860 |
| | — |
| | 2,860 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | $ | 380,342 |
| | $ | 82 |
| | $ | 380,260 |
| | $ | — |
| | $ | 349,986 |
| | $ | 87 |
| | $ | 349,899 |
| | $ | — |
| $ | 410,462 |
| | $ | — |
| | $ | 410,462 |
| | $ | — |
| | $ | 380,342 |
| | $ | 82 |
| | $ | 380,260 |
| | $ | — |
|
| | (a) | U.S. Large Cap funds seek to outperform the Russell 1000 (R) Index with investments in 1,000 large and medium capitalization U.S. companies represented in the Russell 1000 (R) Index, which is composed of the largest 1,000 U.S. equities in the Russell 3000 (R) Index as determined by market capitalization. The Russell 3000 (R) Index is composed of the largest U.S. equities as determined by market capitalization. |
| | (b) | U.S. Small Cap funds seek to outperform the Russell 2000 (R) Index with investments in medium and small capitalization U.S. companies represented in the Russell 2000 (R) Index, which is composed of the smallest 2,000 U.S. equities in the Russell 3000 (R) Index as determined by market capitalization. |
| | (c) | International Large Cap funds seek to outperform the MSCI Europe, Australia, and Far East Index with investments in most of the developed nations of the world so as to maintain a high degree of diversification among countries and currencies. |
| | (d) | Emerging Markets funds represent a diversified portfolio that seeks high, long-term returns comparable to investments in emerging markets by investing in stocks from newly developed emerging market economies. |
| | (e) | World Equity funds seek to outperform the Russell Developed Large Cap Index Net over a full market cycle. The fund's goal is to provide a favorable total return relative to the benchmark, primarily through long-term capital appreciation. |
| | (f) | LDI funds seek to outperform the Barclays-Russell LDI Index by investing in high quality, mostly corporate bonds and fixed income securities that closely match those found in discount curves used to value the plan's liabilities. |
| | (g) | Long-Term Government/Credit funds seek to outperform the Barclays Capital U.S. Long-Term Government/Credit Index by generating excess return through a variety of diversified strategies in securities with longer durations, such as sector rotation, security selection and tactical use of high-yield bonds. |
| | (f)(h) | Intermediate Bonds seek to outperform the Barclays Capital U.S. Aggregate Bond Index by generating excess return through a variety of diversified strategies in securities with short to intermediate durations, such as sector rotation, security selection and tactical use of high-yield bonds. |
| | (g)(i) | Details have not been provided due to immateriality. |
Non-U.S. Defined Benefit Plans —
We maintain defined benefit pension plans, which cover some or all of our employees in the following countries: Austria, France, Germany, India, Indonesia, Italy, Japan, Mexico, The Netherlands, Sweden and the U.K. The assets in the U.K. (two
plans) and The Netherlands (one plan) represent 98%97% of the total non-U.S. plan assets ("non-U.S. assets"). Details of other countries’ plan assets have not been provided due to immateriality.
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following are assumptions related to the non-U.S. defined benefit pension plans: | | | Year Ended December 31, | Year Ended December 31, | | 2012 | | 2011 | | 2010 | 2013 | | 2012 | | 2011 | Weighted average assumptions used to determine Benefit Obligations: | |
| | |
| | |
| |
| | |
| | |
| Discount rate | 4.16 | % | | 5.09 | % | | 5.13 | % | 4.22 | % | | 4.16 | % | | 5.09 | % | Rate of increase in compensation levels | 3.84 |
| | 3.56 |
| | 3.46 |
| 3.83 |
| | 3.84 |
| | 3.56 |
| Weighted average assumptions used to determine net pension expense: | | | | | | | | | | | Long-term rate of return on assets | 5.78 | % | | 6.13 | % | | 6.21 | % | 5.49 | % | | 5.78 | % | | 6.13 | % | Discount rate | 5.09 |
| | 5.13 |
| | 5.41 |
| 4.16 |
| | 5.09 |
| | 5.13 |
| Rate of increase in compensation levels | 3.56 |
| | 3.46 |
| | 3.58 |
| 3.84 |
| | 3.56 |
| | 3.46 |
|
At December 31, 20122013 as compared with December 31, 20112012, we decreasedincreased our average discount rate for non-U.S. plans from 5.09%4.16% to 4.16%4.22% based primarily on lower applicable corporate AA bond yields forrates remaining steady in the Euro zoneEurozone, U.K. and the U.K. In determining 2012Venezuela while all other non-U.S. countries discount rates increased. To determine 2013 pension expense, we decreased our average expected rate of return on plan assets from 6.13% at December 31, 2011 to 5.78% at December 31, 2012 to 5.49% at December 31, 2013, primarily as a result of a decrease in theour target asset allocations and expected return on long-term bond yields.asset returns. As the expected rate of return on plan assets is long-term in nature, short-term market changes do not significantly impact the rates.rate. Many of our non-U.S. defined benefit plans are unfunded, as permitted by local regulation. The expected long-term rate of return on assets for funded plans was determined by assessing the rates of return for each asset class and is calculated using a quantitative approach that utilizes unadjusted historical returns and asset allocation as inputs for the calculation. We work with our actuaries to determine the reasonableness of our long-term rate of return assumptions by looking at several factors including historical returns, expected future returns, asset allocation, risks by asset class and other items. Net pension expense for non-U.S. defined benefit pension plans was: | | | Year Ended December 31, | Year Ended December 31, | | 2012 | | 2011 | | 2010 | 2013 | | 2012 | | 2011 | | (Amounts in thousands) | (Amounts in thousands) | Service cost | $ | 4,681 |
| | $ | 5,113 |
| | $ | 4,691 |
| $ | 6,819 |
| | $ | 4,681 |
| | $ | 5,113 |
| Interest cost | 13,724 |
| | 13,867 |
| | 12,776 |
| 13,486 |
| | 13,724 |
| | 13,867 |
| Expected return on plan assets | (8,542 | ) | | (8,382 | ) | | (7,164 | ) | (9,200 | ) | | (8,542 | ) | | (8,382 | ) | Amortization of unrecognized net loss | 4,020 |
| | 2,172 |
| | 2,367 |
| 6,650 |
| | 4,020 |
| | 2,172 |
| Settlement and other | 43 |
| | 239 |
| | 131 |
| 134 |
| | 43 |
| | 239 |
| Non-U.S. net pension expense | $ | 13,926 |
| | $ | 13,009 |
| | $ | 12,801 |
| $ | 17,889 |
| | $ | 13,926 |
| | $ | 13,009 |
|
The estimated net loss for the defined benefit pension plans that will be amortized from accumulated other comprehensive loss into non-U.S. pension expense in 20132014 is $6.66.9 million. We amortize estimated net losses over the remaining expected service period or over the remaining expected lifetime of inactive participants for plans with only inactive participants. The following summarizes the net pension liability for non-U.S. plans: | | | December 31, | December 31, | | 2012 | | 2011 | 2013 | | 2012 | | (Amounts in thousands) | (Amounts in thousands) | Plan assets, at fair value | $ | 173,017 |
| | $ | 145,112 |
| $ | 195,042 |
| | $ | 173,017 |
| Benefit Obligation | (340,348 | ) | | (271,638 | ) | (363,425 | ) | | (340,348 | ) | Funded status | $ | (167,331 | ) | | $ | (126,526 | ) | $ | (168,383 | ) | | $ | (167,331 | ) |
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following summarizes amounts recognized in the balance sheet for non-U.S. plans: | | | December 31, | December 31, | | 2012 | | 2011 | 2013 | | 2012 | \ | (Amounts in thousands) | (Amounts in thousands) | Noncurrent assets | $ | — |
| | $ | 3,257 |
| $ | 52 |
| | $ | — |
| Current liabilities | (8,398 | ) | | (7,909 | ) | (9,048 | ) | | (8,398 | ) | Noncurrent liabilities | (158,933 | ) | | (121,874 | ) | (159,387 | ) | | (158,933 | ) | Funded status | $ | (167,331 | ) | | $ | (126,526 | ) | $ | (168,383 | ) | | $ | (167,331 | ) |
The following is a reconciliation of the non-U.S. plans’ defined benefit pension obligations: | | | 2012 | | 2011 | 2013 | | 2012 | | (Amounts in thousands) | (Amounts in thousands) | Balance — January 1 | $ | 271,638 |
| | $ | 263,970 |
| $ | 340,348 |
| | $ | 271,638 |
| Service cost | 4,681 |
| | 5,113 |
| 6,819 |
| | 4,681 |
| Interest cost | 13,724 |
| | 13,867 |
| 13,486 |
| | 13,724 |
| Employee contributions | 210 |
| | 345 |
| 267 |
| | 210 |
| Plan amendments and other | 2,114 |
| | (1,511 | ) | 1,573 |
| | 2,114 |
| Actuarial loss(1) | 51,277 |
| | 10,693 |
| 8,664 |
| | 51,277 |
| Net benefits and expenses paid | (13,735 | ) | | (15,525 | ) | (16,491 | ) | | (13,735 | ) | Currency translation impact(2) | 10,439 |
| | (5,314 | ) | 8,759 |
| | 10,439 |
| Balance — December 31 | $ | 340,348 |
| | $ | 271,638 |
| $ | 363,425 |
| | $ | 340,348 |
| Accumulated benefit obligations at December 31 | $ | 316,667 |
| | $ | 252,795 |
| $ | 340,223 |
| | $ | 316,667 |
|
| | (1) | The 2012 actuarial losses primarily reflect the impact of assumption changes in the Euro zone and U.K. plans in 2012 and the U.K. plans in 2011.for 2012. |
| | (2) | The currency translation impact in 2012 reflects the weakening of the U.S. dollar exchange rate against our significant currencies, primarily the British pound and the Euro. |
The following table summarizes the expected cash benefit payments for the non-U.S. defined benefit plans in the future (amounts in millions): | | 2013 | $ | 14.8 |
| | 2014 | 13.9 |
| $ | 16.9 |
| 2015 | 15.2 |
| 16.1 |
| 2016 | 15.8 |
| 16.8 |
| 2017 | 17.2 |
| 18.3 |
| 2018-2022 | 97.6 |
| | 2018 | | 19.5 |
| 2019-2023 | | 107.8 |
|
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table shows the change in accumulated other comprehensive loss attributable to the components of the net cost and the change in Benefit Obligations for non-U.S. plans, net of tax: | | | 2012 | | 2011 | | 2010 | 2013 | | 2012 | | 2011 | | (Amounts in thousands) | (Amounts in thousands) | Balance — January 1 | $ | (43,110 | ) | | $ | (38,819 | ) | | $ | (39,649 | ) | $ | (76,197 | ) | | $ | (43,110 | ) | | $ | (38,819 | ) | Amortization of net loss | 2,985 |
| | 1,609 |
| | 1,349 |
| 4,999 |
| | 2,985 |
| | 1,609 |
| Net loss arising during the year | (33,692 | ) | | (6,763 | ) | | (1,305 | ) | (6,091 | ) | | (33,692 | ) | | (6,763 | ) | Settlement loss | 100 |
| | 155 |
| | 75 |
| 93 |
| | 100 |
| | 155 |
| Prior service benefit (cost) arising during the year | 32 |
| | 191 |
| | (677 | ) | | Prior service benefit arising during the year | | 137 |
| | 32 |
| | 191 |
| Currency translation impact and other | (2,512 | ) | | 517 |
| | 1,388 |
| (1,804 | ) | | (2,512 | ) | | 517 |
| Balance — December 31 | $ | (76,197 | ) | | $ | (43,110 | ) | | $ | (38,819 | ) | $ | (78,863 | ) | | $ | (76,197 | ) | | $ | (43,110 | ) |
Amounts recorded in accumulated other comprehensive loss consist of: | | | December 31, | December 31, | | 2012 | | 2011 | 2013 | | 2012 | | (Amounts in thousands) | (Amounts in thousands) | Unrecognized net loss | $ | (74,656 | ) | | $ | (42,433 | ) | $ | (77,379 | ) | | $ | (74,656 | ) | Unrecognized prior service cost | (1,541 | ) | | (677 | ) | (1,484 | ) | | (1,541 | ) | Accumulated other comprehensive loss, net of tax: | $ | (76,197 | ) | | $ | (43,110 | ) | | Accumulated other comprehensive loss, net of tax | | $ | (78,863 | ) | | $ | (76,197 | ) |
The following is a reconciliation of the non-U.S. plans’ defined benefit pension assets: | | | 2012 | | 2011 | 2013 | | 2012 | | (Amounts in thousands) | (Amounts in thousands) | Balance — January 1 | $ | 145,112 |
| | $ | 133,944 |
| $ | 173,017 |
| | $ | 145,112 |
| Return on plan assets | 14,561 |
| | 10,279 |
| 10,480 |
| | 14,561 |
| Employee contributions | 210 |
| | 345 |
| 267 |
| | 210 |
| Company contributions | 20,270 |
| | 18,149 |
| 22,695 |
| | 20,270 |
| Currency translation impact and other | 6,599 |
| | (1,797 | ) | 5,074 |
| | 6,599 |
| Net benefits and expenses paid | (13,735 | ) | | (15,525 | ) | (16,491 | ) | | (13,735 | ) | Settlements | — |
| | (283 | ) | | Balance — December 31 | $ | 173,017 |
| | $ | 145,112 |
| $ | 195,042 |
| | $ | 173,017 |
|
Our contributions to non-U.S. defined benefit pension plans in 20132014 are expected to be approximately $1013 million, excluding direct benefits paid.
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The asset allocations for the non-U.S. defined benefit pension plans at the end of 20122013 and 20112012 are as follows: | | | | Target Allocation at December 31, | | Percentage of Actual Plan Assets at December 31, | | Target Allocation at December 31, | | Percentage of Actual Plan Assets at December 31, | Asset category | | 2012 | | 2011 | | 2012 | | 2011 | | 2013 | | 2012 | | 2013 | | 2012 | North American Companies | | 5 | % | | 5 | % | | 5 | % | | 5 | % | | 3 | % | | 5 | % | | 3 | % | | 5 | % | U.K. Companies | | 19 | % | | 20 | % | | 19 | % | | 20 | % | | 10 | % | | 19 | % | | 10 | % | | 19 | % | European Companies | | 6 | % | | 6 | % | | 6 | % | | 6 | % | | 4 | % | | 6 | % | | 4 | % | | 6 | % | Asian Pacific Companies | | 5 | % | | 5 | % | | 5 | % | | 5 | % | | 3 | % | | 5 | % | | 3 | % | | 5 | % | Global Equity | | 1 | % | | 1 | % | | 1 | % | | 1 | % | | 8 | % | | 1 | % | | 8 | % | | 1 | % | Equity securities | | 36 | % | | 37 | % | | 36 | % | | 37 | % | | 28 | % | | 36 | % | | 28 | % | | 36 | % | U.K. Government Gilt Index | | 21 | % | | 21 | % | | 21 | % | | 21 | % | | 28 | % | | 21 | % | | 28 | % | | 21 | % | U.K. Corporate Bond Index | | 19 | % | | 17 | % | | 19 | % | | 17 | % | | 21 | % | | 19 | % | | 21 | % | | 19 | % | Global Fixed Income Bond | | 22 | % | | 23 | % | | 22 | % | | 23 | % | | 20 | % | | 22 | % | | 20 | % | | 22 | % | Fixed income | | 62 | % | | 61 | % | | 62 | % | | 61 | % | | 69 | % | | 62 | % | | 69 | % | | 62 | % | Other | | 2 | % | | 2 | % | | 2 | % | | 2 | % | | 3 | % | | 2 | % | | 3 | % | | 2 | % |
None of our common stock is held directly by these plans. In all cases, our investment strategy for these plans is to earn a long-term rate of return consistent with an acceptable degree of risk and minimize our cash contributions over the life of the plan, while taking into account the liquidity needs of the plan and the legal requirements of the particular country. We preserve capital through diversified investments in high quality securities. Asset allocation differs by plan based upon the plan’s Benefit Obligation to participants, as well as the results of asset and liability studies that are conducted for each plan and in consideration of our future cash flow needs. Professional money management firms manage plan assets and we engage consultants in the U.K. and The Netherlands to assist in evaluation of these activities. The assets of the U.K. plans are overseen by a group of Trustees who review the investment strategy, asset allocation and fund selection. These assets are passively managed as they are invested in index funds that attempt to match the performance of the specified benchmark index. The assets of The Netherlands plan are independently managed by an outside service provider.
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The fair values of the non-U.S. assets were: | | | At December 31, 2012 | | At December 31, 2011 | At December 31, 2013 | | At December 31, 2012 | | | | Hierarchical Levels | | | | Hierarchical Levels | | | Hierarchical Levels | | | | Hierarchical Levels | | Total | | I | | II | | III | | Total | | I | | II | | III | Total | | I | | II | | III | | Total | | I | | II | | III | | (Amounts in thousands) | | (Amounts in thousands) | (Amounts in thousands) | | (Amounts in thousands) | Cash | $ | 261 |
| | $ | 261 |
| | $ | — |
| | $ | — |
| | $ | 453 |
| | $ | 453 |
| | $ | — |
| | $ | — |
| $ | 189 |
| | $ | 189 |
| | $ | — |
| | $ | — |
| | $ | 261 |
| | $ | 261 |
| | $ | — |
| | $ | — |
| Commingled Funds: | |
| | | | | | | | |
| | | | | | | |
| | | | | | | | |
| | | | | | | Equity securities | |
| | | | | | | | |
| | | | | | | |
| | | | | | | | |
| | | | | | | North American Companies(a) | 8,527 |
| | — |
| | 8,527 |
| | — |
| | 7,276 |
| | — |
| | 7,276 |
| | — |
| 6,459 |
| | — |
| | 6,459 |
| | — |
| | 8,527 |
| | — |
| | 8,527 |
| | — |
| U.K. Companies(b) | 33,389 |
| | — |
| | 33,389 |
| | — |
| | 28,372 |
| | — |
| | 28,372 |
| | — |
| 19,448 |
| | — |
| | 19,448 |
| | — |
| | 33,389 |
| | — |
| | 33,389 |
| | — |
| European Companies (c) | 10,417 |
| | — |
| | 10,417 |
| | — |
| | 8,459 |
| | — |
| | 8,459 |
| | — |
| 8,060 |
| | — |
| | 8,060 |
| | — |
| | 10,417 |
| | — |
| | 10,417 |
| | — |
| Asian Pacific Companies(d) | 7,995 |
| | — |
| | 7,995 |
| | — |
| | 6,722 |
| | — |
| | 6,722 |
| | — |
| 5,613 |
| | — |
| | 5,613 |
| | — |
| | 7,995 |
| | — |
| | 7,995 |
| | — |
| Global Equity(e) | 1,895 |
| | — |
| | 1,895 |
| | — |
| | 1,745 |
| | — |
| | 1,745 |
| | — |
| 16,046 |
| | — |
| | 16,046 |
| | — |
| | 1,895 |
| | — |
| | 1,895 |
| | — |
| Fixed income securities | |
| | | | | | | | |
| | | | | | | |
| | | | | | | | |
| | | | | | | U.K. Government Gilt Index(f) | 35,614 |
| | — |
| | 35,614 |
| | — |
| | 30,707 |
| | — |
| | 30,707 |
| | — |
| 55,078 |
| | — |
| | 55,078 |
| | — |
| | 35,614 |
| | — |
| | 35,614 |
| | — |
| U.K. Corporate Bond Index(g) | 33,311 |
| | — |
| | 33,311 |
| | — |
| | 25,004 |
| | — |
| | 25,004 |
| | — |
| 40,039 |
| | — |
| | 40,039 |
| | — |
| | 33,311 |
| | — |
| | 33,311 |
| | — |
| Global Fixed Income Bond(h) | 37,476 |
| | — |
| | 37,476 |
| | — |
| | 33,743 |
| | — |
| | 33,743 |
| | — |
| 38,335 |
| | — |
| | 38,335 |
| | — |
| | 37,476 |
| | — |
| | 37,476 |
| | — |
| Other(i) | 4,132 |
| | — |
| | — |
| | 4,132 |
| | 2,631 |
| | — |
| | — |
| | 2,631 |
| 5,775 |
| | — |
| | — |
| | 5,775 |
| | 4,132 |
| | — |
| | — |
| | 4,132 |
| | $ | 173,017 |
| | $ | 261 |
| | $ | 168,624 |
| | $ | 4,132 |
| | $ | 145,112 |
| | $ | 453 |
| | $ | 142,028 |
| | $ | 2,631 |
| $ | 195,042 |
| | $ | 189 |
| | $ | 189,078 |
| | $ | 5,775 |
| | $ | 173,017 |
| | $ | 261 |
| | $ | 168,624 |
| | $ | 4,132 |
|
| | (a) | North American Companies represents U.S. and Canadian large cap equity index funds, which are passively managed and track their respective benchmarks (FTSE All-World USA Index and FTSE All-World Canada Index). |
| | (b) | U.K. Companies represents a U.K. equity index fund, which is passively managed and tracks the FTSE All-Share Index. |
| | (c) | European Companiescompanies represents a European equity index fund, which is passively managed and tracks the FTSE All-World Developed Europe Ex-U.K. Index. |
| | (d) | Asian Pacific Companies represents Japanese and Pacific Rim equity index funds, which are passively managed and track their respective benchmarks (FTSE All-World Japan Index and FTSE All-World Developed Asia Pacific Ex-Japan Index). |
| | (e) | Global Equity represents actively managed, global equity funds taking a top-down strategic view on the different regions by analyzing companies based on fundamentals, market-driven, thematic and quantitative factors to generate alpha. |
| | (f) | U.K. Government Gilt Index represents U.K. government issued fixed income investments which are passively managed and track the respective benchmarks (FTSE U.K. Gilt Index-Linked Over 5 Years Index, and FTSE U.K. Gilt Over 15 Years Index and FTSE U.K. Gilt Index-Linked Over 25 Years Index). |
| | (g) | U.K. Corporate Bond Index represents U.K. corporate bond investments, which are passively managed and track the iBoxx Over 15 years £ Non-Gilt Index. |
| | (h) | Global Fixed Income Bond represents mostly European fixed income investment funds that are actively managed, diversified and primarily invested in traditional government bonds, high-quality corporate bonds, asset-backedasset backed securities, emerging market debt and high yield corporates. |
| | (i) | Includes assets held by plans outside the U.K. and The Netherlands, the details of which,Netherlands. Details, including Level III rollforward details, have not been provided due to immateriality. |
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Defined Benefit Pension Plans with Accumulated Benefit Obligations in Excess of Plan Assets — The following summarizes key pension plan information regarding U.S. and non-U.S. plans whose accumulated benefit obligations exceed the fair value of their respective plan assets. The decrease in 2013 is primarily due to exclusion of the U.S. Qualified Plan which has a net asset position at December 31, 2013. | | | December 31, | December 31, | | 2012 | | 2011 | 2013 | | 2012 | | (Amounts in thousands) | (Amounts in thousands) | Benefit Obligation | $ | 758,296 |
| | $ | 640,162 |
| $ | 367,460 |
| | $ | 758,296 |
| Accumulated benefit obligation | 738,357 |
| | 623,169 |
| 346,684 |
| | 738,357 |
| Fair value of plan assets | 549,300 |
| | 473,801 |
| 189,827 |
| | 549,300 |
|
Postretirement Medical Plans — We sponsor several defined benefit postretirement medical plans covering certain current retirees and a limited number of future retirees in the U.S. These plans provide for medical and dental benefits and are administered through insurance companies and health maintenance organizations. The plans include participant contributions, deductibles, co-insurance provisions and other limitations and are integrated with Medicare and other group plans. We fund the plans as benefits and health maintenance organization premiums are paid, such that the plans hold no assets in any period presented. Accordingly, we have no investment strategy or targeted allocations for plan assets. Benefits under our postretirement medical plans are not available to new employees or most existing employees. The following are assumptions related to postretirement benefits: | | | Year Ended December 31, | Year Ended December 31, | | 2012 | | 2011 | | 2010 | 2013 | | 2012 | | 2011 | Weighted average assumptions used to determine Benefit Obligation: | |
| | |
| | |
| |
| | |
| | |
| Discount rate | 3.25 | % | | 4.25 | % | | 4.75 | % | 4.00 | % | | 3.25 | % | | 4.25 | % | Weighted average assumptions used to determine net expense: | | | | | | | | | | | Discount rate | 4.25 | % | | 4.75 | % | | 5.25 | % | 3.25 | % | | 4.25 | % | | 4.75 | % |
The assumed ranges for the annual rates of increase in medical costs used to determine net expense were 7.5% for 2013, 8.0% for 2012, and 8.5% for 2011 and 9.0% for 2010, with a gradual decrease to 5.0% for 2032 and future years. Net postretirement benefit income for postretirement medical plans was: | | | Year Ended December 31, | Year Ended December 31, | | 2012 | | 2011 | | 2010 | 2013 | | 2012 | | 2011 | | (Amounts in thousands) | (Amounts in thousands) | Service cost | $ | 11 |
| | $ | 12 |
| | $ | 28 |
| $ | 6 |
| | $ | 11 |
| | $ | 12 |
| Interest cost | 1,462 |
| | 1,782 |
| | 1,940 |
| 1,066 |
| | 1,462 |
| | 1,782 |
| Amortization of unrecognized prior service benefit | (41 | ) | | (1,558 | ) | | (1,916 | ) | — |
| | (41 | ) | | (1,558 | ) | Amortization of unrecognized net gain | (1,542 | ) | | (1,463 | ) | | (2,480 | ) | (1,280 | ) | | (1,542 | ) | | (1,463 | ) | Net postretirement benefit income | $ | (110 | ) | | $ | (1,227 | ) | | $ | (2,428 | ) | $ | (208 | ) | | $ | (110 | ) | | $ | (1,227 | ) |
No estimated prior service benefit or cost is expected to be amortized from accumulated other comprehensive loss into U.S. pension expense in 2013.2014. The estimated net gain for postretirement medical plans that will be amortized from accumulated other comprehensive loss into U.S. expense in 20132014 is $1.21.4 million.
The following summarizes the accrued postretirement benefits liability for the postretirement medical plans: | | | December 31, | December 31, | | 2012 | | 2011 | 2013 | | 2012 | | (Amounts in thousands) | (Amounts in thousands) | Postretirement Benefit Obligation | $ | 34,967 |
| | $ | 35,045 |
| $ | 31,477 |
| | $ | 34,967 |
| Funded status | $ | (34,967 | ) | | $ | (35,045 | ) | $ | (31,477 | ) | | $ | (34,967 | ) |
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following summarizes amounts recognized in the balance sheet for postretirement Benefit Obligation:
| | | December 31, | December 31, | | 2012 | | 2011 | 2013 | | 2012 | | (Amounts in thousands) | (Amounts in thousands) | Current liabilities | $ | (4,250 | ) | | $ | (4,278 | ) | $ | (4,013 | ) | | $ | (4,250 | ) | Noncurrent liabilities | (30,717 | ) | | (30,767 | ) | (27,464 | ) | | (30,717 | ) | Funded status | $ | (34,967 | ) | | $ | (35,045 | ) | $ | (31,477 | ) | | $ | (34,967 | ) |
The following is a reconciliation of the postretirement Benefit Obligation: | | | 2012 | | 2011 | 2013 | | 2012 | | (Amounts in thousands) | (Amounts in thousands) | Balance — January 1 | $ | 35,045 |
| | $ | 39,053 |
| $ | 34,967 |
| | $ | 35,045 |
| Service cost | 11 |
| | 12 |
| 6 |
| | 11 |
| Interest cost | 1,462 |
| | 1,782 |
| 1,066 |
| | 1,462 |
| Employee contributions | 2,126 |
| | 2,445 |
| 2,151 |
| | 2,126 |
| Medicare subsidies receivable | 500 |
| | 450 |
| 789 |
| | 500 |
| Actuarial loss (gain) | 2,213 |
| | (1,877 | ) | | Actuarial (gain) loss | | (857 | ) | | 2,213 |
| Net benefits and expenses paid | (6,390 | ) | | (6,820 | ) | (6,645 | ) | | (6,390 | ) | Balance — December 31 | $ | 34,967 |
| | $ | 35,045 |
| $ | 31,477 |
| | $ | 34,967 |
|
The following presents expected benefit payments for future periods (amounts in millions): | | | Expected Payments | | Medicare Subsidy | Expected Payments | | Medicare Subsidy | 2013 | $ | 4.3 |
| | $ | 0.2 |
| | 2014 | 4.0 |
| | 0.2 |
| $ | 4.1 |
| | $ | 0.2 |
| 2015 | 3.8 |
| | 0.2 |
| 3.9 |
| | 0.2 |
| 2016 | 3.5 |
| | 0.2 |
| 3.6 |
| | 0.2 |
| 2017 | 3.3 |
| | 0.2 |
| 3.4 |
| | 0.2 |
| 2018-2022 | 11.9 |
| | 0.8 |
| | 2018 | | 3.1 |
| | 0.2 |
| 2019-2023 | | 11.1 |
| | 0.9 |
|
The following table shows the change in accumulated other comprehensive loss attributable to the components of the net cost and the change in Benefit Obligations for postretirement benefits, net of tax: | | | 2012 | | 2011 | | 2010 | 2013 | | 2012 | | 2011 | | (Amounts in thousands) | (Amounts in thousands) | Balance — January 1 | $ | 7,081 |
| | $ | 7,793 |
| | $ | 10,915 |
| $ | 4,710 |
| | $ | 7,081 |
| | $ | 7,793 |
| Amortization of net gain | (963 | ) | | (911 | ) | | (1,525 | ) | (800 | ) | | (963 | ) | | (911 | ) | Amortization of prior service benefit | (26 | ) | | (971 | ) | | (1,179 | ) | — |
| | (26 | ) | | (971 | ) | Net (loss) gain arising during the year | (1,382 | ) | | 1,170 |
| | (418 | ) | | Net gain (loss) arising during the year | | 535 |
| | (1,382 | ) | | 1,170 |
| Balance — December 31 | $ | 4,710 |
| | $ | 7,081 |
| | $ | 7,793 |
| $ | 4,445 |
| | $ | 4,710 |
| | $ | 7,081 |
|
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Amounts recorded in accumulated other comprehensive loss consist of: | | | | | | | | | | December 31, | | 2012 | | 2011 | | (Amounts in thousands) | Unrecognized net gain | $ | 4,710 |
| | $ | 7,055 |
| Unrecognized prior service benefit | — |
| | 26 |
| Accumulated other comprehensive income, net of tax: | $ | 4,710 |
| | $ | 7,081 |
|
| | | | | | | | | | December 31, | | 2013 | | 2012 | | (Amounts in thousands) | Unrecognized net gain | $ | 4,445 |
| | $ | 4,710 |
| Accumulated other comprehensive income, net of tax | $ | 4,445 |
| | $ | 4,710 |
|
We made contributions to the postretirement medical plans to pay benefits of $3.7 million in 2013, $3.8 million in 2012, and $3.9 million in 2011 and $3.8 million in 2010. Because the postretirement medical plans are unfunded, we make contributions as the covered individuals’ claims are approved for payment. Accordingly, contributions during any period are directly correlated to the benefits paid. Assumed health care cost trend rates have an effect on the amounts reported for the postretirement medical plans. A one-percentage point change in assumed health care cost trend rates would have the following effect on the 20122013 reported amounts (in thousands): | | | 1% Increase | | 1% Decrease | 1% Increase | | 1% Decrease | Effect on postretirement Benefit Obligation | $ | 251 |
| | $ | (260 | ) | $ | 207 |
| | $ | (221 | ) | Effect on service cost plus interest cost | 15 |
| | (15 | ) | 6 |
| | (6 | ) |
Defined Contribution Plans — We sponsor several defined contribution plans covering substantially all U.S. and Canadian employees and certain other non-U.S. employees. Employees may contribute to these plans, and these contributions are matched in varying amounts by us, including opportunities for discretionary matching contributions by us. Defined contribution plan expense was $20.0 million in 2013, $19.3 million in 2012, and $17.8 million in 2011 and $17.3 million in 2010.
Participants in the U.S. defined contribution plan have the option to invest in our common stock and, prior to 2009, discretionary contributions by us were funded with our common stock; therefore, the plan assets include such holdings of our common stock. Effective January 1, 2013, our common stock is no longer an investment option. Prior to 2013, participants in the U.S. defined contribution plan had the option to invest in our common stock, therefore, the plan assets prior to 2013 include such holdings of our common stock. Participants with existing holdings of our stock on the effective date will beare able to maintain their holdings until such time as they are reallocated within the plan by the participant or taken as a distribution by the participant.
| | 13. | 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 primarily 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. Although infrequent, from time to time we have tried cases, one of which resulted in an unfavorable ruling during the third quarter of 2013. The impact of the verdict is not material, and we intend to vigorously contest the ruling. We established a loss reserve and related insurance receivable based on the reasonably estimable and probable outcome of the case. 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.
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
United Nations Oil-for-Food Program In mid-2006, 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.court. In July 2012, the French Courtcourt ruled against our procedural motions to challenge the constitutionality of the charges and quash the indictment. While the French Court ruling is currently proceeding through a formal review process, we currently do not expect to incur additional case resolution costs of a material amount in this matter. However, if the French authorities 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. In addition to the governmental investigation referenced above, on June 27, 2008, the Republic of Iraq filed a civil suit in federal court in New York against 93 participants in the United Nations Oil-for-Food Program, including us and our two foreign subsidiaries that participated in the program. On February 6, 2013 the U.S. District Court for the Southern District of New York issued a ruling that dismissed the suit with prejudice. On February 15, 2013 the plaintiff appealed the District Court's ruling.There have been no material developments in this case since it was initially filed. We will continueintend to vigorously contest the suit, and we believe that we have valid defenses to the claims asserted. WeWhile we cannot predict the outcome of the suit at the present time, we do not currently believe the resolution of this suit 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. 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.
We have recorded reserves for product warranty claims that are included in both current and noncurrent liabilities. The following is a summary of the activity in the warranty reserve: | | | 2012 | | 2011 | | 2010 | 2013 | | 2012 | | 2011 | | (Amounts in thousands) | (Amounts in thousands) | Balance — January 1 | $ | 38,033 |
| | $ | 34,374 |
| | $ | 38,024 |
| $ | 35,400 |
| | $ | 38,033 |
| | $ | 34,374 |
| Accruals for warranty expense, net of adjustments | 28,851 |
| | 35,535 |
| | 24,779 |
| 33,504 |
| | 28,851 |
| | 35,535 |
| Settlements made | (31,484 | ) | | (31,876 | ) | | (28,429 | ) | (31,076 | ) | | (31,484 | ) | | (31,876 | ) | Balance — December 31 | $ | 35,400 |
| | $ | 38,033 |
| | $ | 34,374 |
| $ | 37,828 |
| | $ | 35,400 |
| | $ | 38,033 |
|
Stock Split –On May 23, 2013, our certificate of incorporation was amended to increase the number of authorized shares of common stock from 120.0 million to 305.0 million and enable a three-for-one stock split approved by the Board of Directors on February 7, 2013 in the form of a 200% common stock dividend. The record date for the stock split was June 7, 2013, and additional shares were distributed on June 21, 2013. As a result of the three-for-one stock split, 117,861,772 shares of common stock were issued. The par value of the common stock remained unchanged at $1.25 per share, which required $147.3 million to be retrospectively reclassified from capital in excess of par value to common shares all within the shareholders' equity section of our consolidated balance sheets. Shareholders' equity and all share data, including treasury shares and stock-based compensation award shares, and per share data presented herein have been retrospectively adjusted to reflect the impact of the increase in authorized shares and the stock split, as appropriate. Dividends - On February 19, 2013,17, 2014, our Board of Directors authorized an increase in the payment of quarterly dividends on our common stock from $0.360.14 per share to $0.16 per share payable beginning on April 11, 2014. On February 19, 2013, our Board of Directors authorized an increase in the payment of quarterly dividends on our common stock from $0.12 per share to $0.420.14 per share payable beginning on April 12, 2013.2013. On February 20, 2012, our Board of Directors authorized an increase in the payment of dividends on our common stock from $0.320.11 per share to $0.360.12 per share payable quarterly beginning on April 13, 2012. On February 21, 2011, our Board of Directors authorized an increase in the payment of quarterly dividends on our common stock from $0.29 per share to $0.32 per share payable quarterly beginning on April 14, 2011. 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 May 31, 2012, we announced that our Board of Directors endorsed an updated capital structure strategy. A part of thisa capital structure strategy includes returning additional capital more quickly to shareholders through anthat expanded our share repurchase program ofto $1.0 billion. The $1.0 billion share repurchase program authorization included approximately $233 million of remaining capacity under our prior share repurchase program, which was originally approved by our Board of Directors on September 12, 2011 and replenished on December 15, 2011. On February 19, 2013, our Board of Directors approved a $750 million share repurchase authorization, which included approximately $193 million of remaining capacity under the $1.0 billion 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. As a part of the $1.0 billion share repurchase program, on June 14, 2012, we entered into an accelerated share repurchase program (“ASR Program”) with J.P. Morgan Securities LLC, as agent for JPMorgan Chase Bank, N.A., London Branch, under which we agreed to repurchase an aggregate of $300.0 million of our common stock. Under the ASR Program, we paid $300.0 million and received an initial delivery of 2,260,738 shares, representing 80% of the ASR Program's value at the then-current share price. The remaining 20% of the ASR Program's value was delivered on December 12, 2012 at program settlement, which resulted in us receiving an additional 153,659 shares. The total 2,414,3977,243,191 shares repurchased under the ASR Program were based on the volume-weighted average price of $126.93,$42.31, which was our average common stock price during the repurchase period, less an agreed upon discount. Inclusive of the total shares of 2,414,397 delivered under the ASR Program,On a post-split basis, we repurchased 6,212,7808,142,723, 1,482,83318,638,340 and 450,0004,448,499 shares for $458.3 million, $771.9 million and $150.0 million and $46.0 million during 20122013, 20112012 and 20102011, respectively. As of December 31, 2012,2013, we have $285.7384.4 million of remaining capacity under our current share repurchase program.
The provision for income taxes consists of the following:
| | | Year Ended December 31, | Year Ended December 31, | | 2012 | | 2011 | | 2010 | 2013 | | 2012 | | 2011 | | (Amounts in thousands) | (Amounts in thousands) | Current: | |
| | |
| | |
| |
| | |
| | |
| U.S. federal | $ | 73,444 |
| | $ | 42,596 |
| | $ | 12,557 |
| $ | 61,670 |
| | $ | 73,444 |
| | $ | 42,596 |
| Non-U.S. | 101,166 |
| | 95,677 |
| | 93,046 |
| 112,471 |
| | 101,166 |
| | 95,677 |
| State and local | 3,454 |
| | 6,567 |
| | 1,468 |
| 7,537 |
| | 3,454 |
| | 6,567 |
| Total current | 178,064 |
| | 144,840 |
| | 107,071 |
| 181,678 |
| | 178,064 |
| | 144,840 |
| Deferred: | |
| | |
| | |
| |
| | |
| | |
| U.S. federal | (823 | ) | | 19,086 |
| | 34,732 |
| 8,771 |
| | (823 | ) | | 19,086 |
| Non-U.S. | (17,268 | ) | | (11,918 | ) | | (2,830 | ) | 13,120 |
| | (17,268 | ) | | (11,918 | ) | State and local | 793 |
| | 6,516 |
| | 2,623 |
| 1,132 |
| | 793 |
| | 6,516 |
| Total deferred | (17,298 | ) | | 13,684 |
| | 34,525 |
| 23,023 |
| | (17,298 | ) | | 13,684 |
| Total provision | $ | 160,766 |
| | $ | 158,524 |
| | $ | 141,596 |
| $ | 204,701 |
| | $ | 160,766 |
| | $ | 158,524 |
|
The expected cash payments for the current income tax expense for 20122013, 20112012 and 20102011 were reduced by $11.010.1 million, $5.711.0 million and $10.05.7 million, respectively, as a result of tax deductions related to the exercise of non-qualified employee stock
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
options and the vesting of restricted stock. The income tax benefit resulting from these stock-based compensation plans has increased capital in excess of par value. The provision for income taxes differs from the statutory corporate rate due to the following:
| | | Year Ended December 31, | Year Ended December 31, | | 2012 | | 2011 | | 2010 | 2013 | | 2012 | | 2011 | | (Amounts in millions) | (Amounts in millions) | Statutory federal income tax at 35% | $ | 214.0 |
| | $ | 205.7 |
| | $ | 185.6 |
| $ | 242.6 |
| | $ | 214.0 |
| | $ | 205.7 |
| Foreign impact, net | (50.6 | ) | | (55.0 | ) | | (37.6 | ) | (40.7 | ) | | (50.6 | ) | | (55.0 | ) | State and local income taxes, net | 4.2 |
| | 13.1 |
| | 4.1 |
| 8.7 |
| | 4.2 |
| | 13.1 |
| Other | (6.8 | ) | | (5.3 | ) | | (10.5 | ) | (5.9 | ) | | (6.8 | ) | | (5.3 | ) | Total | $ | 160.8 |
| | $ | 158.5 |
| | $ | 141.6 |
| $ | 204.7 |
| | $ | 160.8 |
| | $ | 158.5 |
| Effective tax rate | 26.3 | % | | 27.0 | % | | 26.7 | % | 29.5 | % | | 26.3 | % | | 27.0 | % |
The 20122013, 20112012 and 20102011 effective tax rates differed from the federal statutory rate of 35% primarily due to the net impact of foreign operations, which included the impacts of lower foreign tax rates and changes in our reserves established for uncertain tax positions. We assert permanent reinvestment on the majority of invested capital and unremitted foreign earnings in our foreign subsidiaries. However, we do not assert permanent reinvestment on a limited number of foreign subsidiaries where future distributions may occur. The cumulative amount of undistributed earnings considered permanently reinvested is $1.61.7 billion. Should these permanently reinvested earnings be repatriated in a future period in the form of dividends or otherwise, our provision for income taxes may increase materially in that period. Quantification of the deferred tax liability, if any, associated with indefinitely reinvested differences is not practicable. During each of the three years reported in the period ended December 31, 20122013, we have not recognized any net deferred tax assets attributable to excess foreign tax credits on unremitted earnings or foreign currency translation adjustments in our foreign subsidiaries with excess financial reporting basis. For those subsidiaries where permanent reinvestment was not asserted, we had cash and deemed dividend distributions that resulted in the recognition of $2.35.0 million of income tax expense in the year ended December 31, 20122013 and $9.52.3 million and $8.2 9.5
million of income tax benefit during the years ended December 31, 20112012 and 20102011, respectively. As we have not recorded a benefit for the excess foreign tax credits associated with deemed repatriation of unremitted earnings, these credits are not available to offset the liability associated with these dividends. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the consolidated deferred tax assets and liabilities were:
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | December 31, | December 31, | | 2012 | | 2011 | 2013 | | 2012 | | (Amounts in thousands) | (Amounts in thousands) | Deferred tax assets related to: | |
| | |
| |
| | |
| Retirement benefits | $ | 47,112 |
| | $ | 36,735 |
| $ | 25,798 |
| | $ | 47,112 |
| Net operating loss carryforwards | 28,801 |
| | 32,694 |
| 23,943 |
| | 28,801 |
| Compensation accruals | 53,307 |
| | 43,418 |
| 54,518 |
| | 53,307 |
| Inventories | 60,556 |
| | 50,159 |
| 56,487 |
| | 60,556 |
| Credit carryforwards | 35,384 |
| | 44,861 |
| 32,384 |
| | 35,384 |
| Warranty and accrued liabilities | 24,263 |
| | 20,451 |
| 20,626 |
| | 24,263 |
| Other | 36,965 |
| | 28,058 |
| 42,809 |
| | 36,965 |
| Total deferred tax assets | 286,388 |
| | 256,376 |
| 256,565 |
| | 286,388 |
| Valuation allowances | (17,975 | ) | | (17,686 | ) | (18,058 | ) | | (17,975 | ) | Net deferred tax assets | 268,413 |
| | 238,690 |
| 238,507 |
| | 268,413 |
| Deferred tax liabilities related to: | |
| | |
| |
| | |
| Property, plant and equipment | (27,246 | ) | | (33,056 | ) | (36,191 | ) | | (27,246 | ) | Goodwill and intangibles | (128,227 | ) | | (115,634 | ) | (138,635 | ) | | (128,227 | ) | Other | (8,299 | ) | | (8,044 | ) | (9,269 | ) | | (8,299 | ) | Total deferred tax liabilities | (163,772 | ) | | (156,734 | ) | (184,095 | ) | | (163,772 | ) | Deferred tax assets, net | $ | 104,641 |
| | $ | 81,956 |
| $ | 54,412 |
| | $ | 104,641 |
|
We have $163.4147.4 million of U.S. and foreign net operating loss carryforwards at December 31, 20122013. Of this total, $44.539.7 million are state net operating losses. Net operating losses generated in the U.S., if unused, will expire in 20132014 through 2027. The majority of our non-U.S. net operating losses carry forward without expiration. Additionally, we have $31.427.9 million of foreign tax credit carryforwards at December 31, 20122013, expiring in 2020 and 2021through 2023 for which noa valuation allowance reserves haveof $0.8 million has been recorded. Earnings before income taxes comprised:
| | | Year Ended December 31, | Year Ended December 31, | | 2012 | | 2011 | | 2010 | 2013 | | 2012 | | 2011 | | (Amounts in thousands) | (Amounts in thousands) | U.S. | $ | 220,684 |
| | $ | 247,684 |
| | $ | 201,997 |
| $ | 231,179 |
| | $ | 220,684 |
| | $ | 247,684 |
| Non-U.S. | 390,881 |
| | 340,071 |
| | 328,280 |
| 461,842 |
| | 390,881 |
| | 340,071 |
| Total | $ | 611,565 |
| | $ | 587,755 |
| | $ | 530,277 |
| $ | 693,021 |
| | $ | 611,565 |
| | $ | 587,755 |
|
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
A tabular reconciliation of the total gross amount of unrecognized tax benefits, excluding interest and penalties, is as follows (in millions):
| | | 2012 | | 2011 | 2013 | | 2012 | | 2011 | Balance — January 1 | $ | 93.8 |
| | $ | 104.6 |
| $ | 59.1 |
| | $ | 93.8 |
| | $ | 104.6 |
| Gross amount of increases (decreases) in unrecognized tax benefits resulting from tax positions taken: | |
| | |
| |
| | |
| | | During a prior year | (1.4 | ) | | 1.0 |
| 3.9 |
| | (1.4 | ) | | 1.0 |
| During the current period | 10.3 |
| | 8.8 |
| 8.9 |
| | 10.3 |
| | 8.8 |
| Decreases in unrecognized tax benefits relating to: | | | | | | | |
|
| Settlements with taxing authorities | (21.0 | ) | | (9.8 | ) | (0.1 | ) | | (21.0 | ) | | (9.8 | ) | Lapse of the applicable statute of limitations | (23.0 | ) | | (8.3 | ) | (11.5 | ) | | (23.0 | ) | | (8.3 | ) | Increases (decreases) in unrecognized tax benefits relating to foreign currency translation adjustments | 0.4 |
| | (2.5 | ) | | (Decreases) increases in unrecognized tax benefits relating to foreign currency translation adjustments | | (1.0 | ) | | 0.4 |
| | (2.5 | ) | Balance — December 31 | $ | 59.1 |
| | $ | 93.8 |
| $ | 59.3 |
| | $ | 59.1 |
| | $ | 93.8 |
|
The amount of gross unrecognized tax benefits at December 31, 20122013 was $77.675.5 million, which includes $18.516.2 million of accrued interest and penalties. Of this amount $55.057.2 million, if recognized, would favorably impact our effective tax rate. During the years ended December 31, 20122013, 20112012 and 20102011 we recognized net interest and penalty income of $2.92.4 million, $1.92.9 million and $2.31.9 million, respectively, in our consolidated statementstatements of income. With limited exception, we are no longer subject to U.S. federal income tax audits for years through 2010,2011, state and local income tax audits for years through 20082009 or non-U.S. income tax audits for years through 2005.2007. We are currently under examination for various years in Austria, Canada, France, Germany, India, Italy, Singapore, the U.S., Venezuela and Vietnam.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 up to approximately $14 million within the next 12 months.
| | 17. | BUSINESS SEGMENT INFORMATION |
Our business segments, defined below, 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. We conduct our operations through these three business segments based on type of product and how we manage the business: EPD for long lead time, custom and other highly-engineered pumps and pump systems, mechanical seals, auxiliary systems and replacement parts and related services; Industrial Product Division ("IPD")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. For decision-making purposes, our Chief Executive Officer ("CEO") and other members of senior executive management use financial information generated and reported at the reportable segment level. Our corporate headquarters does not constitute a separate division or business segment. On January 11, 2012, a new unified operational leadership structure was announced resulting in the creation of a Chief Operating Officer position. The creation of this position did not impact how we have defined the above three business segments or our assessment of our CEO as the chief operating decision maker. We evaluate segment performance and allocate resources based on each reportable segment’s operating income. Amounts classified as "Eliminations and All Other" include corporate headquarters costs and other minor entities that do not constitute separate segments. Intersegment sales and transfers are recorded at cost plus a profit margin, with the sales and related margin on such sales eliminated in consolidation.
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following is a summary of the financial information of our reportable segments as of and for the years ended December 31, 20122013, 20112012 and 20102011 reconciled to the amounts reported in the consolidated financial statements. | | | | | | | Subtotal—Reportable Segments | | Eliminations and All Other(1) | | Consolidated Total | | | | | Subtotal—Reportable Segments | | Eliminations and All Other(1) | | Consolidated Total | | EPD | | IPD | | FCD | | EPD | | IPD | | FCD | | | (Amounts in thousands) | (Amounts in thousands) | Year Ended December 31, 2012: | |
| | |
| | |
| | |
| | |
| | |
| | Year Ended December 31, 2013: | | |
| | |
| | |
| | |
| | |
| | |
| Sales to external customers |
| $2,338,527 |
| | $ | 863,941 |
| | $ | 1,548,871 |
| | $ | 4,751,339 |
| | $ | — |
| | $ | 4,751,339 |
|
| $2,473,731 |
| | $ | 873,389 |
| | $ | 1,607,499 |
| | $ | 4,954,619 |
| | $ | — |
| | $ | 4,954,619 |
| Intersegment sales | 64,621 |
| | 89,957 |
| | 8,206 |
| | 162,784 |
| | (162,784 | ) | | — |
| 63,365 |
| | 76,779 |
| | 8,213 |
| | 148,357 |
| | (148,357 | ) | | — |
| Segment operating income | 396,082 |
| | 99,526 |
| | 253,398 |
| | 749,006 |
| | (73,228 | ) | | 675,778 |
| 423,339 |
| | 115,658 |
| | 307,967 |
| | 846,964 |
| | (86,681 | ) | | 760,283 |
| Depreciation and amortization | 48,007 |
| | 13,408 |
| | 36,418 |
| | 97,833 |
| | 9,393 |
| | 107,226 |
| 46,494 |
| | 14,122 |
| | 36,590 |
| | 97,206 |
| | 9,186 |
| | 106,392 |
| Identifiable assets | 2,223,791 |
| | 745,276 |
| | 1,485,686 |
| | 4,454,753 |
| | 356,205 |
| | 4,810,958 |
| 2,260,961 |
| | 827,155 |
| | 1,520,085 |
| | 4,608,201 |
| | 428,532 |
| | 5,036,733 |
| Capital expenditures | 64,038 |
| | 17,351 |
| | 46,239 |
| | 127,628 |
| | 7,911 |
| | 135,539 |
| 75,379 |
| | 17,445 |
| | 40,205 |
| | 133,029 |
| | 6,061 |
| | 139,090 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Subtotal—Reportable Segments | | Eliminations and All Other(1) | | Consolidated Total | | EPD | | IPD | | FCD | | | | | (Amounts in thousands) | Year Ended December 31, 2012: | |
| | |
| | |
| | |
| | |
| | |
| Sales to external customers | $ | 2,338,527 |
| | $ | 863,941 |
| | $ | 1,548,871 |
| | $ | 4,751,339 |
| | $ | — |
| | $ | 4,751,339 |
| Intersegment sales | 64,621 |
| | 89,957 |
| | 8,206 |
| | 162,784 |
| | (162,784 | ) | | — |
| Segment operating income | 396,082 |
| | 99,526 |
| | 253,398 |
| | 749,006 |
| | (73,228 | ) | | 675,778 |
| Depreciation and amortization | 48,007 |
| | 13,408 |
| | 36,418 |
| | 97,833 |
| | 9,393 |
| | 107,226 |
| Identifiable assets | 2,223,791 |
| | 745,276 |
| | 1,485,686 |
| | 4,454,753 |
| | 356,205 |
| | 4,810,958 |
| Capital expenditures | 64,038 |
| | 17,351 |
| | 46,239 |
| | 127,628 |
| | 7,911 |
| | 135,539 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Subtotal—Reportable Segments | | Eliminations and All Other(1) | | Consolidated Total | | EPD | | IPD | | FCD | | | | | (Amounts in thousands) | Year Ended December 31, 2011: | |
| | |
| | |
| | |
| | |
| | |
| Sales to external customers | $ | 2,239,405 |
| | $ | 802,864 |
| | $ | 1,467,932 |
| | $ | 4,510,201 |
| | $ | — |
| | $ | 4,510,201 |
| Intersegment sales | 81,978 |
| | 75,337 |
| | 5,414 |
| | 162,729 |
| | (162,729 | ) | | — |
| Segment operating income | 395,184 |
| | 62,906 |
| | 233,329 |
| | 691,419 |
| | (72,742 | ) | | 618,677 |
| Depreciation and amortization | 41,199 |
| | 13,864 |
| | 40,912 |
| | 95,975 |
| | 11,586 |
| | 107,561 |
| Identifiable assets | 2,055,600 |
| | 740,179 |
| | 1,406,531 |
| | 4,202,310 |
| | 420,304 |
| | 4,622,614 |
| Capital expenditures | 44,714 |
| | 12,834 |
| | 43,797 |
| | 101,345 |
| | 6,622 |
| | 107,967 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Subtotal—Reportable Segments | | Eliminations and All Other(1) | | Consolidated Total | | EPD | | IPD | | FCD | | | | | (Amounts in thousands) | Year Ended December 31, 2010: | |
| | |
| | |
| | |
| | |
| | |
| Sales to external customers | $ | 2,087,040 |
| | $ | 754,826 |
| | $ | 1,190,170 |
| | $ | 4,032,036 |
| | $ | — |
| | $ | 4,032,036 |
| Intersegment sales | 65,636 |
| | 45,358 |
| | 7,349 |
| | 118,343 |
| | (118,343 | ) | | — |
| Segment operating income | 412,622 |
| | 68,480 |
| | 180,409 |
| | 661,511 |
| | (80,159 | ) | | 581,352 |
| Depreciation and amortization | 39,629 |
| | 18,089 |
| | 34,906 |
| | 92,624 |
| | 11,917 |
| | 104,541 |
| Identifiable assets | 1,791,886 |
| | 664,573 |
| | 1,342,915 |
| | 3,799,374 |
| | 660,536 |
| | 4,459,910 |
| Capital expenditures | 54,478 |
| | 12,130 |
| | 31,312 |
| | 97,920 |
| | 4,082 |
| | 102,002 |
|
| | (1) | The changes in identifiable assets for "Eliminations and All Other" in 20122013, 20112012 and 20102011 are primarily a result of changes in cash balances. |
Geographic Information — We attribute sales to different geographic areas based on the facilities’ locations. Long-lived assets are classified based on the geographic area in which the assets are located and exclude deferred tax assets categorized as noncurrent.taxes, goodwill and intangible assets. Prior period information has been updated to conform to current year presentation. Sales and long-lived assets by geographic area are as follows:
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | Year Ended December 31, 2012 | Year Ended December 31, 2013 | | Sales | | Percentage | | Long-Lived Assets | | Percentage | Sales | | Percentage | | Long-Lived Assets | | Percentage | | (Amounts in thousands, except percentages) | (Amounts in thousands, except percentages) | United States | $ | 1,597,737 |
| | 33.6 | % | | $ | 1,104,251 |
| | 54.0 | % | $ | 1,699,053 |
| | 34.3 | % | | $ | 374,125 |
| | 41.5 | % | EMA(1) | 2,054,809 |
| | 43.2 | % | | 684,804 |
| | 33.5 | % | 2,102,428 |
| | 42.4 | % | | 287,071 |
| | 31.8 | % | Asia(2) | 548,589 |
| | 11.6 | % | | 123,492 |
| | 6.0 | % | 552,383 |
| | 11.2 | % | | 124,619 |
| | 13.8 | % | Other(3) | 550,204 |
| | 11.6 | % | | 131,489 |
| | 6.5 | % | 600,755 |
| | 12.1 | % | | 115,904 |
| | 12.9 | % | Consolidated total | $ | 4,751,339 |
| | 100.0 | % | | $ | 2,044,036 |
| | 100.0 | % | $ | 4,954,619 |
| | 100.0 | % | | $ | 901,719 |
| | 100.0 | % |
| | | Year Ended December 31, 2011 | Year Ended December 31, 2012 | | Sales | | Percentage | | Long-Lived Assets | | Percentage | Sales | | Percentage | | Long-Lived Assets | | Percentage | | (Amounts in thousands, except percentages) | (Amounts in thousands, except percentages) | United States | $ | 1,507,209 |
| | 33.4 | % | | $ | 1,095,616 |
| | 55.4 | % | $ | 1,597,737 |
| | 33.6 | % | | $ | 332,667 |
| | 39.6 | % | EMA(1) | 1,954,212 |
| | 43.3 | % | | 671,305 |
| | 34.0 | % | 2,054,809 |
| | 43.2 | % | | 273,274 |
| | 32.5 | % | Asia(2) | 517,375 |
| | 11.5 | % | | 100,344 |
| | 5.1 | % | 548,589 |
| | 11.6 | % | | 122,911 |
| | 14.6 | % | Other(3) | 531,405 |
| | 11.8 | % | | 109,152 |
| | 5.5 | % | 550,204 |
| | 11.6 | % | | 111,257 |
| | 13.3 | % | Consolidated total | $ | 4,510,201 |
| | 100.0 | % | | $ | 1,976,417 |
| | 100.0 | % | $ | 4,751,339 |
| | 100.0 | % | | $ | 840,109 |
| | 100.0 | % |
| | | Year Ended December 31, 2010 | Year Ended December 31, 2011 | | Sales | | Percentage | | Long-Lived Assets | | Percentage | Sales | | Percentage | | Long-Lived Assets | | Percentage | | (Amounts in thousands, except percentages) | (Amounts in thousands, except percentages) | United States | $ | 1,331,818 |
| | 33.0 | % | | $ | 1,031,184 |
| | 53.9 | % | $ | 1,507,209 |
| | 33.4 | % | | $ | 314,405 |
| | 40.9 | % | EMA(1) | 1,844,291 |
| | 45.7 | % | | 687,495 |
| | 36.0 | % | 1,954,212 |
| | 43.3 | % | | 262,083 |
| | 34.1 | % | Asia(2) | 423,461 |
| | 10.5 | % | | 96,040 |
| | 5.0 | % | 517,375 |
| | 11.5 | % | | 99,278 |
| | 12.9 | % | Other(3) | 432,466 |
| | 10.8 | % | | 97,104 |
| | 5.1 | % | 531,405 |
| | 11.8 | % | | 92,092 |
| | 12.1 | % | Consolidated total | $ | 4,032,036 |
| | 100.0 | % | | $ | 1,911,823 |
| | 100.0 | % | $ | 4,510,201 |
| | 100.0 | % | | $ | 767,858 |
| | 100.0 | % |
___________________________________ | | (1) | "EMA" includes Europe, the Middle East and Africa. Germany accounted for approximately 8% of 2012, 9% of 2011 and 9% of 2010 consolidated sales, and Italy accounted for approximately 10% of consolidated long-lived assets in both 2012 and 2011. No other individual country within this group represents 10% or more of consolidated totals for any period presented. |
| | (2) | "Asia" includes Asia and Australia. No individual country within this group represents 10% or more of consolidated totals for any period presented. |
| | (3) | "Other" includes Canada and Latin America. No individual country within this group represents 10% or more of consolidated totals for any period presented. |
Net sales to international customers, including export sales from the U.S., represented approximately 71% of total sales in 20122013, and 73%71% in each of 20112012 and 73% in 20102011. Major Customer Information — We have a large number of customers across a large number of manufacturing and service facilities and do not believe that we have sales to any individual customer that represent 10% or more of consolidated sales for any of the years presented.
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | 18. | ACCUMULATED OTHER COMPREHENSIVE LOSS |
The following presents the components of accumulated other comprehensive loss, net of related tax effects: | | | | | | | | | | | | | | Year Ended December 31, | | 2012 | | 2011 | | 2010 | | (Amounts in thousands) | Foreign currency translation adjustments(1)(2) | $ | (61,083 | ) | | $ | (79,267 | ) | | $ | (22,425 | ) | Pension and other postretirement effects | (161,757 | ) | | (134,774 | ) | | (126,284 | ) | Cash flow hedging activity | (254 | ) | | (735 | ) | | (428 | ) | Accumulated other comprehensive loss | $ | (223,094 | ) | | $ | (214,776 | ) | | $ | (149,137 | ) |
| | | | | | | | | | | | | | | | | (Amounts in thousands) | Foreign currency translation items(1)(2) | | Pension and other postretirement effects | | Cash flow hedging activity(3) | | Total(1) | | | Balance - January 1, 2013 | $ | (61,083 | ) | | $ | (161,757 | ) | | $ | (254 | ) | | $ | (223,094 | ) | Other comprehensive (loss) income before reclassifications, net of taxes | (30,087 | ) | | 18,951 |
| | (1,501 | ) | | (12,637 | ) | Amounts reclassified from accumulated other comprehensive loss, net of taxes | 1,217 |
| | 13,278 |
| | 941 |
| | 15,436 |
| Net current-period other comprehensive (loss) income, net of taxes | (28,870 | ) | | 32,229 |
| | (560 | ) | | 2,799 |
| Balance - December 31, 2013 | $ | (89,953 | ) | | $ | (129,528 | ) | | $ | (814 | ) | | $ | (220,295 | ) |
| | (1) | Includes foreign currency translation adjustments attributable to noncontrolling interests of $1.2 million for both December 31, 2013 and 2012, and $1.3 million and $1.4 millionatDecember 31, 2012, 2011, and 2010, respectively.. |
| | (2) | Foreign currency translation adjustments in 20122013 primarily represents the strengtheningweakening of the Euro,Argentinian peso, Mexican peso, and Indian rupee, Canadian dollar and Australian dollar exchange raterates versus the U.S. dollar at December 31, 20122013 as compared with December 31, 2011. Foreign currency translation adjustments in 2011 primarily represents the strengthening of the U.S. dollar exchange rate versus the Euro and the British pound at December 31, 2011 as compared with December 31, 20102012. |
| | (3) | Other comprehensive loss before reclassifications, net of taxes was $0.4 million and amounts reclassified from accumulated other comprehensive loss, net of taxes was $0.9 million for the twelve months ended December 31, 2012 for cash flow hedging activity. |
The following table presents the reclassifications out of accumulated other comprehensive loss for the year ended December 31, 2013:
| | | | | | | (Amounts in thousands) | Amount reclassified from accumulated other comprehensive loss (1) | | Affected line item in the statement of income | Foreign currency translation items | | | | Release of cumulative translation adjustments upon sale of equity method investment | $ | (1,217 | ) | | Net earnings from affiliates | | — |
| | Tax (expense) benefit | | $ | (1,217 | ) | | Net of tax | | | | | Cash flow hedging activity | | | | Interest rate swaps | $ | (1,506 | ) | | Interest expense | | 565 |
| | Tax benefit | | $ | (941 | ) | | Net of tax | | | | | Pension and other postretirement effects | | | | Amortization of actuarial losses | $ | (19,669 | ) | | (2) | | 6,391 |
| | Tax benefit | | $ | (13,278 | ) | | Net of tax |
(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 12 for additional details. At December 31, 2013, we expect to recognize losses of $0.9 million, net of deferred taxes, into earnings in the next twelve months related to interest rate swap agreements based on their fair values at December 31, 2013. | | 19. | QUARTERLY FINANCIAL DATA (UNAUDITED) |
The following presents a summary of the unaudited quarterly data for 20122013 and 20112012 (amounts in millions, except per share data): | | | | 2012 | | 2013 | Quarter | | 4th | | 3rd | | 2nd | | 1st | | 4th | | 3rd | | 2nd | | 1st | Sales | | $ | 1,328.2 |
| | $ | 1,165.9 |
| | $ | 1,182.2 |
| | $ | 1,075.0 |
| | $ | 1,389.4 |
| | $ | 1,229.1 |
| | $ | 1,239.5 |
| | $ | 1,096.6 |
| Gross profit | | 447.6 |
| | 389.6 |
| | 384.6 |
| | 359.2 |
| | 470.5 |
| | 422.7 |
| | 421.6 |
| | 373.3 |
| Earnings before income taxes | | 189.8 |
| | 144.6 |
| | 148.1 |
| | 129.1 |
| | 191.7 |
| | 182.4 |
| | 171.3 |
| | 147.6 |
| Net earnings attributable to Flowserve Corporation | | 141.6 |
| | 106.3 |
| | 107.3 |
| | 93.1 |
| | 141.1 |
| | 126.3 |
| | 120.4 |
| | 97.8 |
| Earnings per share (1): | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| Basic | | $ | 2.85 |
| | $ | 2.09 |
| | $ | 1.99 |
| | $ | 1.71 |
| | $ | 1.01 |
| | $ | 0.90 |
| | $ | 0.85 |
| | $ | 0.68 |
| Diluted | | 2.83 |
| | 2.07 |
| | 1.98 |
| | 1.69 |
| | 1.01 |
| | 0.90 |
| | 0.84 |
| | 0.67 |
|
| | | | 2011 | | 2012 | Quarter | | 4th | | 3rd | | 2nd | | 1st | | 4th | | 3rd | | 2nd | | 1st | Sales | | $ | 1,265.4 |
| | $ | 1,121.8 |
| | $ | 1,125.8 |
| | $ | 997.2 |
| | $ | 1,328.2 |
| | $ | 1,165.9 |
| | $ | 1,182.2 |
| | $ | 1,075.0 |
| Gross profit | | 420.0 |
| | 376.6 |
| | 369.3 |
| | 347.7 |
| | 447.6 |
| | 389.6 |
| | 384.6 |
| | 359.2 |
| Earnings before income taxes | | 180.2 |
| | 140.0 |
| | 137.0 |
| | 130.6 |
| | 189.8 |
| | 144.6 |
| | 148.1 |
| | 129.1 |
| Net earnings attributable to Flowserve Corporation | | 125.1 |
| | 107.8 |
| | 98.7 |
| | 97.0 |
| | 141.6 |
| | 106.3 |
| | 107.3 |
| | 93.1 |
| Earnings per share (1): | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| Basic | | $ | 2.27 |
| | $ | 1.94 |
| | $ | 1.77 |
| | $ | 1.74 |
| | $ | 0.95 |
| | $ | 0.70 |
| | $ | 0.66 |
| | $ | 0.57 |
| Diluted | | 2.25 |
| | 1.92 |
| | 1.76 |
| | 1.72 |
| | 0.94 |
| | 0.69 |
| | 0.66 |
| | 0.56 |
|
| | (1) | Earnings per share is computed independently for each of the quarters presented. The sum of the quarters may not equal the total year amount due to the impact of changes in weighted average quarterly shares outstanding. |
The significant pre-tax fourth quarter adjustment for 2013 was to record $10.7 million in charges related to our realignment program. See Note 20 for additional information on our realignment program.
| | 20. | SUBSEQUENT EVENTREALIGNMENT PROGRAM |
In the fourth quarter of 2013, we initiated a realignment program to reduce and optimize certain non-strategic QRC and manufacturing facilities and our overall cost structure ("2013 Realignment Program"). We expect total 2013 Realignment Program charges will be $15.8 million for approved plans, of which $10.7 million has been incurred through December 31, 2013. Previously, we had separate realignment programs that began in 2009 and were substantially complete in 2011.
On February 8,The realignment program consists 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 primarily represent employee severance. Non-restructuring charges are costs incurred to improve operating efficiency and reduce redundancies and primarily represent employee severance. Expenses are reported in COS or SG&A, as applicable, in our consolidated statements of income.
Realignment charges, net of adjustments, were $10.7 million, $(0.7) million and $11.9 million for years ended December 31, 2013,, 2012 and 2011, respectively. Of the Venezuelan government announced its intention2013 charges $3.9 million was recorded in EPD, $3.8 million in FCD and $2.5 million in IPD. The majority of these charges are restructuring in nature. Generally, the aforementioned charges were or will be paid in cash, except for asset write-downs, which are non-cash charges. The majority of remaining cash payments related to devalue its currency (bolivar) from 4.3 to 6.3 bolivarsour 2013 Realignment Program will be incurred by the end of 2014. The restructuring reserve related to the U.S. dollar. Our operations in Venezuela generally consist of a service center that performs service and repair activities. 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. Our Venezuelan subsidiary's sales in 2012 and total assets2013 Realignment Program was $6.3 million at December 31, 2012 represented less than 1% of consolidated sales and total assets for the same period. We are currently assessing the ongoing impact of the currency devaluation on our Venezuelan operations and imports into the market, including further actions of the Venezuelan government and economic conditions in Venezuela, such as inflation and capital spending.2013.
| | ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
| | ITEM 9A. | CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures
Our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")) are designed to ensure that the information, which we are required to disclose in the reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the United States ("U.S.") Securities and Exchange Commission's ("SEC") rules and forms, and that such information is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure. In connection with the preparation of this Annual Report on Form 10-K ("Annual Report") for the year ended December 31, 20122013, our management, under the supervision and with the participation of our Principal Executive Officer and our Principal Financial Officer, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 20122013. Based on this evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of December 31, 20122013. Management’s Report on Internal Control Over Financial Reporting Our management, under the supervision and with the participation of our Principal Executive Officer and Principal Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the ("U.S. ("GAAP"). Internal control over financial reporting includes policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with existing policies or procedures may deteriorate. Under the supervision and with the participation of our Principal Executive Officer and Principal Financial Officer, our management conducted an assessment of our internal control over financial reporting as of December 31, 20122013, based on the criteria established in Internal Control - Integrated Framework (1992), issued by the Committee of Sponsoring Organizations of
the Treadway Commission. Based on this assessment, our management has concluded that as of December 31, 20122013, our internal control over financial reporting was effective. The effectiveness of our internal control over financial reporting as of December 31, 20122013, has been audited by PricewaterhouseCoopers LLP, our independent registered public accounting firm, as stated in their report, which is included herein. Changes in Internal Control Over Financial Reporting There were no changes in our internal control over financial reporting during the quarter ended December 31, 20122013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
| | ITEM 9B. | OTHER INFORMATION |
Michael F. Johnston has informed the Company's Board of Directors that he intends to retire from service as a director immediately following the Company's 2013 annual meeting of shareholders to be held on May 23, 2013. Mr. Johnston has served as a member of the Company's Board of Directors since 1997, and he currently serves as Chairman of the Corporate Governance and Nominating Committee and as a member of the Finance Committee.
PART III
| | ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
The information required in this Item 10 is incorporated by reference to our definitive Proxy Statement relating to our 20132014 annual meeting of shareholders to be held on May 23, 2013.22, 2014. The Proxy Statement will be filed with the SEC no later than April 30, 2013.29, 2014.
| | ITEM 11. | EXECUTIVE COMPENSATION |
The information required in this Item 11 is incorporated by reference to our definitive Proxy Statement relating to our 20132014 annual meeting of shareholders to be held on May 23, 2013.22, 2014. The Proxy Statement will be filed with the SEC no later than April 30, 2013.29, 2014.
| | ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The information required in this Item 12 is incorporated by reference to our definitive Proxy Statement relating to our 20132014 annual meeting of shareholders to be held on May 23, 2013.22, 2014. The Proxy Statement will be filed with the SEC no later than April 30, 2013.29, 2014.
| | ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
The information required in this Item 13 is incorporated by reference to our definitive Proxy Statement relating to our 20132014 annual meeting of shareholders to be held on May 23, 2013.22, 2014. The Proxy Statement will be filed with the SEC no later than April 30, 2013.29, 2014.
| | ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES |
The information required in this Item 14 is incorporated by reference to our definitive Proxy Statement relating to our 20132014 annual meeting of shareholders to be held on May 23, 2013.22, 2014. The Proxy Statement will be filed with the SEC no later than April 30, 2013.29, 2014.
PART IV
| | ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES |
(a) Documents filed as a part of this Annual Report: 1. Consolidated Financial Statements The following consolidated financial statements and notes thereto are filed as part of this Annual Report: Report of Independent Registered Public Accounting Firm Flowserve Corporation Consolidated Financial Statements: Consolidated Balance Sheets at December 31, 20122013 and 20112012 For each of the three years in the period ended December 31, 2012:2013: Consolidated Statements of Income and Consolidated Statements of Comprehensive Income Consolidated Statements of Shareholders’ Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements 2. Consolidated Financial Statement Schedules The following consolidated financial statement schedule is filed as part of this Annual Report: | | | Schedule II — Valuation and Qualifying Accounts | F-1 |
Financial statement schedules not included in this Annual Report have been omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto. 3. Exhibits See Index to Exhibits to this Annual Report.
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. | | | FLOWSERVE CORPORATION
| By: | /s/ Mark A. Blinn | | Mark A. Blinn President and Chief Executive Officer |
Date: February 21, 201318, 2014 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. | | | | | | Signature | | Title | | Date | | | | | | /s/ James O. Rollans | | Non-Executive Chairman of the Board | | February 21, 201318, 2014 | James O. Rollans | | | | | | | | | | /s/ Mark A. Blinn | | President and Chief Executive Officer (Principal Executive Officer ) | | February 21, 201318, 2014 | Mark A. Blinn | | | | | | | | | /s/ Michael S. Taff | | Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) | | February 21, 201318, 2014 | Michael S. Taff | | | | | | | | | | | | | /s/ Leif E. Dainer | | Director | | February 18, 2014 | Leif E. Dainer | | | | | | | | | | /s/ Gayla J. Delly | | Director | | February 21, 201318, 2014 | Gayla J. Delly | | | | | | | | | | /s/ Roger L. Fix | | Director | | February 21, 201318, 2014 | Roger L. Fix | | | | | | | | | | /s/ John R. Friedery | | Director | | February 21, 201318, 2014 | John R. Friedery | | | | | | | | | | /s/ Joseph E. Harlan | | Director | | February 21, 201318, 2014 | Joseph E. Harlan | | | | | | | | | | /s/ Michael F. Johnston | | Director | | February 21, 2013 | Michael F. Johnston | | | | | | | | | | /s/ Rick J. Mills | | Director | | February 21, 201318, 2014 | Rick J. Mills | | | | | | | | | | /s/ Charles M. Rampacek | | Director | | February 21, 201318, 2014 | Charles M. Rampacek | | | | | | | | | | /s/ David E. Roberts | | Director | | February 21, 201318, 2014 | David E. Roberts | | | | | | | | | | /s/ William C. Rusnack | | Director | | February 21, 201318, 2014 | William C. Rusnack | | | | |
FLOWSERVE CORPORATION Schedule II — Valuation and Qualifying Accounts
| | Description | | Balance at Beginning of Year | | Additions Charged to Cost and Expenses | | Additions Charged to Other Accounts— Acquisitions and Related Adjustments | | Deductions From Reserve | | Balance at End of Year | | Balance at Beginning of Year | | Additions Charged to Cost and Expenses | | Additions Charged to Other Accounts— Acquisitions and Related Adjustments | | Deductions From Reserve | | Balance at End of Year | | | (Amounts in thousands) | | (Amounts in thousands) | Year Ended December 31, 2013 | | | |
| | |
| | |
| | |
| | |
| Allowance for doubtful accounts(a): | | | $ | 21,491 |
| | $ | 17,412 |
| | $ | 79 |
| | $ | (14,909 | ) | | $ | 24,073 |
| Deferred tax asset valuation allowance(b): | | | 17,975 |
| | 2,352 |
| | — |
| | (2,269 | ) | | 18,058 |
| Year Ended December 31, 2012 | | |
| | |
| | |
| | |
| | |
| | | | | | | | | | |
| Allowance for doubtful accounts(a): | | $ | 20,351 |
| | $ | 22,148 |
| | $ | (36 | ) | | $ | (20,972 | ) | | $ | 21,491 |
| | 20,351 |
| | 22,148 |
| | (36 | ) | | (20,972 | ) | | 21,491 |
| Deferred tax asset valuation allowance(b): | | 17,686 |
| | 3,257 |
| | (657 | ) | | (2,311 | ) | | 17,975 |
| | 17,686 |
| | 3,257 |
| | (657 | ) | | (2,311 | ) | | 17,975 |
| Year Ended December 31, 2011 | | | | | | | | | | |
| | | | | | | | | | |
| Allowance for doubtful accounts(a): | | 18,632 |
| | 21,108 |
| | (57 | ) | | (19,332 | ) | | 20,351 |
| | 18,632 |
| | 21,108 |
| | (57 | ) | | (19,332 | ) | | 20,351 |
| Deferred tax asset valuation allowance(b): | | 14,296 |
| | 4,124 |
| | (43 | ) | | (691 | ) | | 17,686 |
| | 14,296 |
| | 4,124 |
| | (43 | ) | | (691 | ) | | 17,686 |
| Year Ended December 31, 2010 | | | | | | | | | | |
| | Allowance for doubtful accounts(a): | | 18,769 |
| | 17,045 |
| | 505 |
| | (17,687 | ) | | 18,632 |
| | Deferred tax asset valuation allowance(b): | | 17,292 |
| | 1,970 |
| | (315 | ) | | (4,651 | ) | | 14,296 |
| |
| | (a) | Deductions from reserve represent accounts written off and recoveries. |
| | (b) | Deductions from reserve result from the expiration or utilization of net operating losses and foreign tax credits previously reserved. |
INDEX TO EXHIBITS
| | | | Exhibit No. | | Description | | | | 3.1 | | Restated Certificate of Incorporation of Flowserve Corporation (incorporated by reference to Exhibit 3.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2012)2013). | 3.2 | | Flowserve Corporation By-Laws, as amended and restated effective May 18, 2012August 13, 2013 (incorporated by reference to Exhibit 3.1 to the Registrant's QuarterlyCurrent Report on Form 10-Q for the quarter ended June 30, 2012)8-K dated August 13, 2013). | 4.1 | | Senior Indenture, dated September 11, 2012, by and between Flowserve Corporation and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.1 to the Registrant's Current Report on Form 8-K dated September 11, 2012). | 4.2 | | First Supplemental Indenture, dated September 11, 2012, by and among Flowserve Corporation, certain of its subsidiaries and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.2 to the Registrant's Current Report on Form 8-K dated September 11, 2012). | 4.3 | | Second Supplemental Indenture, dated November 1, 2013, by and among Flowserve Corporation, certain of its subsidiaries and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.2 to the Registrant's Current Report on Form 8-K dated November 1, 2013). | 10.1 | | Credit Agreement, dated August 20, 2012, among Flowserve Corporation, Bank of America, N.A., as swingline lender, letter of credit issuer and administrative agent and the other lenders referred to therein (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K, dated August 20, 2012). | 10.2 | | First Amendment to Credit Agreement, dated October 4, 2013, among Flowserve Corporation, Bank of America, N.A., as administrative agent, and the other lenders referred to therein (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K, dated October 4, 2013). | 10.3 | | Letter of Credit Agreement, dated as of September 14, 2007 among Flowserve B.V., as an Applicant, Flowserve Corporation, as an Applicant and as Guarantor, the Additional Applicants from time to time as a party thereto, the various Lenders from time to time as a party thereto, and ABN AMRO Bank, N.V., as Administrative Agent and an Issuing Bank (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K, dated September 19, 2007). | 10.310.4 | | First Amendment to Letter of Credit Agreement, dated as of September 11, 2008 among Flowserve Corporation, Flowserve B.V. and other subsidiaries of the Company party thereto, ABN AMRO Bank, N.V., as Administrative Agent and an Issuing Bank, and the other financial institutions party thereto (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K, dated September 16, 2008). | 10.410.5 | | Second Amendment to Letter of Credit Agreement, dated as of September 9, 2009 among Flowserve Corporation, Flowserve B.V. and other subsidiaries of the Company party thereto, ABN AMRO Bank, N.V., as Administrative Agent and an Issuing Bank, and the other financial institutions party thereto (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K dated September 11, 2009). | 10.510.6 | | Third Amendment to Letter of Credit Agreement, dated October 26, 2012, among Flowserve Corporation, Flowserve B.V. and other subsidiaries of the Company party thereto, Credit Agricole Corporate and Investment Bank (f/k/a Calyon), as Mandated Lead Arranger, Administrative Agent and an Issuing Bank, and the other financial institutions party thereto (incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2012). | 10.610.7 | | Amended and Restated Flowserve Corporation Director Cash Deferral Plan, effective January 1, 2009 (incorporated by reference to Exhibit 10.7 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2008).* | 10.710.8 | | Amended and Restated Flowserve Corporation Director Stock Deferral Plan, dated effective January 1, 2009 (incorporated by reference to Exhibit 10.8 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2008).* | 10.810.9 | | Trust for Non-Qualified Deferred Compensation Benefit Plans, dated February 10, 2011 (incorporated by reference to Exhibit 10.8 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2010).* | 10.910.10 | | 2007 Flowserve Corporation Long-Term Stock Incentive Plan, as amended and restated effective January 1, 2010 (incorporated by reference to Exhibit 10.20 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2009).* | 10.1010.11 | | 2007 Flowserve Corporation Annual Incentive Plan, as amended and restated effective January 1, 2010 (incorporated by reference to Exhibit 10.23 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2009).* | 10.1110.12 | | Flowserve Corporation Deferred Compensation Plan (incorporated by reference to Exhibit 10.23 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2000).* | 10.1210.13 | | Amendment No. 1 to the Flowserve Corporation Deferred Compensation Plan, as amended and restated, effective June 1, 2000 (incorporated by reference to Exhibit 10.50 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2002).* |
| | | | Exhibit No. | | Description | | | | 10.1310.14 | | Amendment to the Flowserve Corporation Deferred Compensation Plan, dated December 14, 2005 (incorporated by reference to Exhibit 10.70 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2004).* | 10.1410.15 | | Amendment No. 3 to the Flowserve Corporation Deferred Compensation Plan, as amended and restated effective June 1, 2000 (incorporated by reference to Exhibit 10.22 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2007).* | 10.1510.16 | | Flowserve Corporation Officer Severance Plan, amended and restated effective January 1, 2010 (incorporated by reference to Exhibit 10.32 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2009).* | 10.1610.17 | | Flowserve Corporation Executive Officer Change In Control Severance Plan, amended and restated effective November 12, 2007 (incorporated by reference to Exhibit 10.38 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2007).* | 10.1710.18 | | First Amendment to the Flowserve Corporation Executive Officer Change In Control Severance Plan, effective January 1, 2011 (incorporated by reference to Exhibit 10.21 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2010).* | 10.1810.19 | | Flowserve Corporation Officer Change In Control Severance Plan, amended and restated effective November 12, 2007 (incorporated by reference to Exhibit 10.39 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2007).* | 10.1910.20 | | First Amendment to the Flowserve Corporation Officer Change In Control Severance Plan, effective January 1, 2011 (incorporated by reference to Exhibit 10.23 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2010).* | 10.2010.21 | | Flowserve Corporation Key Management Change In Control Severance Plan, amended and restated effective November 12, 2007 (incorporated by reference to Exhibit 10.40 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2007).* | 10.2110.22 | | First Amendment to the Flowserve Corporation Key Management Change In Control Severance Plan, effective January 1, 2011 (incorporated by reference to Exhibit 10.25 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2010).* | 10.2210.23 | | Flowserve Corporation Senior Management Retirement Plan, amended and restated effective January 1, 2008 (incorporated by reference to Exhibit 10.42 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2007).* | 10.2310.24 | | Flowserve Corporation Supplemental Executive Retirement Plan, amended and restated effective November 12, 2007 (incorporated by reference to Exhibit 10.43 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2007).* | 10.2410.25 | | Flowserve Corporation 2004 Stock Compensation Plan, effective April 21, 2004 (incorporated by reference to Appendix A to the Registrant's 2004 Proxy Statement, dated May 10, 2004).* | 10.2510.26 | | Amendment Number One to the Flowserve Corporation 2004 Stock Compensation Plan, effective March 6, 2008 (incorporated by reference to Exhibit 10.10 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2008).* | 10.2610.27 | | Amendment Number Two to the Flowserve Corporation 2004 Stock Compensation Plan, effective March 7, 2008 (incorporated by reference to Exhibit 10.11 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2008).* | 10.2710.28 | | Form of Incentive Stock Option Agreement pursuant to the Flowserve Corporation 2004 Stock Compensation Plan (incorporated by reference to Exhibit 10.60 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2004).* | 10.2810.29 | | Form of Non-Qualified Stock Option Agreement pursuant to the Flowserve Corporation 2004 Stock Compensation Plan (incorporated by reference to Exhibit 10.61 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2004).* | 10.2910.30 | | Form of Incentive Stock Option Agreement for certain officers pursuant to the Flowserve Corporation 2004 Stock Compensation Plan (incorporated by reference to Exhibit 10.4 to the Registrant's Current Report on Form 8-K, dated March 9, 2006).* |
| | | | Exhibit No. | | Description | | | | 10.3010.31 | | Form A of Performance Restricted Stock Unit Agreement pursuant to Flowserve Corporation's 2004 Stock Compensation Plan (incorporated by reference to Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2008).* | 10.3110.32 | | Form B of Performance Restricted Stock Unit Agreement pursuant to Flowserve Corporation's 2004 Stock Compensation Plan (incorporated by reference to Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2008).* | 10.3210.33 | | Amendment Number One to the Form A and Form B Performance Restricted Stock Unit Agreements pursuant to Flowserve Corporation's 2004 Stock Compensation Plan, dated March 27, 2008 (incorporated by reference to Exhibit 10.5 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2008).* | 10.3310.34 | | Form A of Restricted Stock Unit Agreement pursuant to Flowserve Corporation's 2004 Stock Compensation Plan (incorporated by reference to Exhibit 10.6 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2008).* | 10.3410.35 | | Form B of Restricted Stock Unit Agreement pursuant to Flowserve Corporation's 2004 Stock Compensation Plan (incorporated by reference to Exhibit 10.7 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2008).* | 10.3510.36 | | Form A of Restricted Stock Agreement pursuant to Flowserve Corporation's 2004 Stock Compensation Plan (incorporated by reference to Exhibit 10.8 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2008).* | 10.3610.37 | | Form B of Restricted Stock Agreement pursuant to Flowserve Corporation's 2004 Stock Compensation Plan (incorporated by reference to Exhibit 10.9 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2008).* | 10.3710.38 | | Flowserve Corporation Equity and Incentive Compensation Plan (incorporated by reference to Appendix A to the Registrant's Proxy Statement on Schedule 14A dated April 3, 2009).* | 10.38+10.39 | | Form A of Restricted Stock Agreement pursuant to the Flowserve Corporation Equity and Incentive Compensation Plan.Plan (incorporated by reference to Exhibit 10.38 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2012).* | 10.39+10.40 | | Form B of Restricted Stock Agreement pursuant to the Flowserve Corporation Equity and Incentive Compensation Plan.Plan (incorporated by reference to Exhibit 10.39 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2012).* | 10.40+10.41 | | Form A of Restricted Stock Unit Agreement pursuant to the Flowserve Corporation Equity and Incentive Compensation Plan.Plan (incorporated by reference to Exhibit 10.40 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2012).* | 10.41+10.42 | | Form B of Restricted Stock Unit Agreement pursuant to the Flowserve Corporation Equity and Incentive Compensation Plan.Plan (incorporated by reference to Exhibit 10.41 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2012).* | 10.42+10.43 | | Form A of Performance Restricted Stock Unit Agreement pursuant to the Flowserve Corporation Equity and Incentive Compensation Plan.Plan (incorporated by reference to Exhibit 10.42 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2012).* | 10.43+10.44 | | Form B of Performance Restricted Stock Unit Agreement pursuant to the Flowserve Corporation Equity and Incentive Compensation Plan.Plan (incorporated by reference to Exhibit 10.43 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2012).* | 10.4410.45 | | Form of Restrictive Covenants Agreement for Officers (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K, dated as of March 9, 2006).* | 14.1 | | Flowserve Financial Management Code of Ethics adopted by the Flowserve Corporation principal executive officer and CEO, principal financial officer and CFO, principal accounting officer and controller, and other senior financial managers (incorporated by reference to Exhibit 14.1 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2002). |
| | | | Exhibit No. | | Description | | | | 21.1+ | | Subsidiaries of the Registrant. | 23.1+ | | Consent of PricewaterhouseCoopers LLP. | 31.1+ | | Certification of Principal Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | 31.2+ | | Certification of Principal Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | 32.1++ | | Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | 32.2++ | | Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | 101.INS | | XBRL Instance Document | 101.SCH | | XBRL Taxonomy Extension Schema Document | 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document | 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document | 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document | 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document |
| | | | * | | Management contracts and compensatory plans and arrangements required to be filed as exhibits to this Annual Report on Form 10-K. | + | | Filed herewith. | ++ | | Furnished herewith. |
|