expense could vary within a range of outcomes and have a material effect on reported earnings. In addition, the assumptions can materially affect accumulated benefit obligations and future cash funding.
We and certain of our subsidiaries have defined benefit pension plans and defined contribution plans for regular full-time and part-time employees. The defined benefit pension plan in the U.S. is the Flowserve Corporation Pension Plan and the defined contribution plan in the U.S. is the Flowserve Corporation Retirement Savings Plan.
Benefits under our defined benefit pension plans are based primarily on years of credited service and on participants’ compensation. Assets under our defined benefit pension plans consist primarily of equity and fixed-income securities. At December 31, 2007,2008, the estimated fair market value of plan assets for our defined benefit pension plans increaseddecreased to $382.3$289.0 million from $365.1$382.3 million at December 31, 2006.2007. Assets were allocated as follows:
The estimated prior service benefit for the defined benefit pension plans that will be amortized from accumulated other comprehensive loss into net pension expense in 20082009 is $1.3 million. 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 20082009 is $4.7$8.9 million. We amortize estimated prior service costs and estimated net loss over the remaining expected service period.
None of our common stock is directly held by these plans.
Consistent with the requirements of SFAS No. 87, 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 necessarily requires actuarial assumptions concerning future events that will determine the amount and timing of the benefit payments.
Revenues for product sales are recognized when the risks and rewards of ownership are transferred to the customers, which is 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 collectibility.collectability. For contracts containing multiple elements, each having a determinable fair value, we recognize revenue in an amount equal to the element’s pro rata share of the contract’s fair value in accordance with the contractual delivery terms for each element. 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.
Revenues for long-term contracts, which include 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 acost-to-cost basis. Percentage of completion revenue represents less than 14%10% of our consolidated sales in 2007.2008.
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 less than 1% of our consolidated sales in 2007.2008.
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, which would adversely affect our results of operations and financial position. In circumstances where the total projected reduced revenues still exceed total projected costs, the incurrence of unrealized incentive fees 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.
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 U.S. andnon-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.
results of operations may also be impacted by unfavorable foreign currency exchange rate movements. See “Item 7A. Quantitative and Qualitative Disclosures about Market Risk.”
We expect to generate sufficient cash from operations to fund our business, capital expenditures, dividend payments, share repurchases, debt payments and pension plan contribution obligations and reduce our utilization of accounts receivable factoring arrangements.contributions in 2009. We seek to continue to improve our working capital utilization, with a particular focus on improving the management of accounts receivable and inventory, and requiring progress billingspayments from customers on long lead time projects. However, the amount of cash generated or consumed by working capital is dependent on our level of revenues, backlog, customer acceptance and other factors. Additionally, tightening in our end markets may limit our ability to require progress payments from customers on new orders. In 2008,2009, our capital expenditures arewill be focused on strategic initiatives to pursue new markets, geographic expansion, capacity expansion, ERP application upgrades, information technology infrastructure and cost reduction opportunities and are expected to be between approximately $115 million and $125$100 million, before consideration of any acquisition activity. While current pension regulations allow us latitude in the amount of contributions, we currently anticipate that our minimum contribution to our qualified U.S. pension plan will be approximately $30 million in 2008. We currently anticipate that our contributions to ournon-U.S. pension plans will be approximately $13 million in 2008. We have $5.6$5.7 million in scheduled repayments in 20082009 under our Credit Facilities. We expect to comply with the covenants under our Credit Facilities in 2008.2009. See the “Liquidity and Capital Resources” section of this MD&A for further discussion of our debt covenants.
The performance of global financial markets in 2008 has reduced the value of investments held in trust to support pension plans. Additionally, U.S. regulations are continually increasing the minimum level of funding for U.S pension plans. The combined impact of these changes will require us to increase our contributions to our pension plans in 2009. We currently anticipate that our minimum contribution to our qualified U.S. pension plan will be between $55 million and $75 million in 2009 in order to reach fully funded status, as defined by the Pension Protection Act, for 2009. We currently anticipate that our contributions to ournon-U.S. pension plans will be approximately $13 million in 2009.
As we have discussed in this and prior publicly filed reports,other public filings, we are currently subject to lawsuits, internal investigations and regulatory investigations in the U.S. and in foreign countries, which could negatively impact our cash flows and results of operations.operations and cash flows. We believe we are currently dealing withaddressing these matters appropriately, and we are diligently striving to achieve the most favorable results.
In February 2007, the Board of Directors approved a quarterly dividend of $0.15 a share. Additional dividends of $0.15 a share were approved See “Item 3. Legal Proceedings” in May, August and November of 2007. Each quarter the Board of Directors will continue to evaluate paying a dividend as a method to return capital to our shareholders.this Annual Report for further discussion.
We expect that our corporate representatives will, from time to time, meet privately with investors, investment analysts, the media and others, and may reiterate the forward-looking statements contained in this “Outlook for 2008”2009” section and elsewhere in this Annual Report, including any such statements that are incorporated by reference in this Annual Report. At the same time, we will keep this Annual Report and our most current “Business Outlook”business outlook publicly available on the “Investor Relations” section of our Investor Relations web site (www.intc.com)website (www.flowserve.com). The public can continue to rely on the Business Outlook published on the web site as representing our current expectations on matters covered, unless we publish a notice stating otherwise. Statements in the Business Outlook and other forward-looking statements in this Annual Report are subject to revision during the course of the year in our quarterly earnings releases and SEC filings and at other times.
54
| |
| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Market risks associated with financial instruments
We have market risk exposure arising from changes in interest rates and foreign currency exchange rate movements.
We enter into forward exchange contracts to hedge our risks associated with transactions denominated in currencies other than the local currency of the operation engaging in the transaction. Our risk management and derivatives policy specifies the conditions under which we may enter into derivative contracts. At December 31, 2007 and 2006, we had $464.9 million and $433.7 million, respectively, of notional amount in outstanding forward contracts with third parties. At December 31, 2007, the length of forward exchange contracts currently in place ranged from 2 days to 20 months.
The fair market value adjustments on our forward contracts are recognized directly in our current period earnings. The fair value of these outstanding forward contracts at December 31, 2007 and 2006 was a net asset of $6.6 million and $3.4 million, respectively. Realized and unrealized gains (losses) from the changes in the fair value of these forward contracts of $5.7 million, $5.8 million, and $(5.2) million, for the years ended December 31, 2007, 2006 and 2005, respectively, are included in other income (expense), net in the consolidated statements of income.
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, 2007 and 2006, we had $395.0 million and $435.0 million, respectively, of notional amount in outstanding interest rate swaps with third parties. At December 31, 2007, the maximum remaining length of any interest rate contract in place was approximately 33 months. The fair value of the interest rate swap agreements was a net liability of $4.1 million and a net asset of $1.9 million at December 31, 2007 and 2006, respectively. Unrealized (losses) gains from the changes in fair value of our interest rate swap agreements, net of reclassifications, of $(3.9) million and $0.7 million, net of tax, for the years ended December 31, 2007 and 2006, respectively, are included in other comprehensive income (loss).
We are exposed to risk from credit-related losses resulting from nonperformancein the event of non-performance by counterparties to our financial instruments. We perform credit evaluations of our counterparties under forward contracts andinstruments, including interest rate swap agreementsswaps and forward exchange contracts, but we currently expect all counterparties will continue to meet their obligations. We have not experienced credit losses from our counterparties.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 Credit Facilities, which bear interest based on floating rates. At December 31, 2007,2008, after the effect of interest rate swaps, we had $160.4$164.7 million of variable rate debt obligations outstanding under our Credit Facilities with a weighted average interest rate of 6.4%2.99%. A hypothetical change of 100-basis100 basis points in the interest rate for these borrowings, assuming constant variable rate debt levels, would have changed interest expense by $1.6 million for the year ended December 31, 2008. As of December 31, 2008 and 2007, we had $385.0 million and $395.0 million, respectively, of notional amount in 2007 by approximately $1.6 million.outstanding interest rate swaps with third parties with varying maturities through December 2010.
5558
We employ a foreign currency risk management strategy to minimize potential lossesForeign Currency Exchange Rate Risk
A substantial portion of our operations are conducted by our subsidiaries outside of the U.S. in earnings or cash flows from unfavorable foreign currency exchange rate movements. These strategiescurrencies other than the U.S. dollar. Almost all of ournon-U.S. subsidiaries conduct their business primarily in their local currencies, which are also minimize potential gains from favorable exchange rate movements.their functional currencies. Foreign currency exposures arise from translation of foreign-denominated assets and liabilities into U.S. dollars and from transactions, including firm commitments and anticipated transactions, denominated in a currency other than an entity’sanon-U.S. subsidiary’s functional currencycurrency. Generally, we view our investments in foreign subsidiaries from a long-term perspective and, fromtherefore, do not hedge these investments. We use capital structuring techniques to manage our investment in foreign subsidiaries as deemed necessary. We realized net (losses) gains associated with foreign currency translation of foreign-denominated assets$(125.9) million, $48.7 million and liabilities into U.S. dollars. $38.9 million for the years ended December 31, 2008, 2007 and 2006, respectively, which are included in other comprehensive (expense) income.
Based on a sensitivity analysis at December 31, 2007,2008, a 10% adverse change in the foreign currency exchange rates couldfor the year ended December 31, 2008 would have impacted our net earnings by approximately $38 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 innon-U.S. dollar sales volumes or prices. This calculation does not take into account the impact of the foreign currency forward exchange contracts discussed below.
We employ a foreign currency risk management strategy to minimize potential changes in cash flows from unfavorable foreign currency exchange rate movements. 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 changes in the fair values of these instruments are included in other income, net in the accompanying consolidated statements of income. As of December 31, 2008, we had a U.S. dollar equivalent of $555.7 million in aggregate notional amount outstanding in forward exchange contracts with third parties, compared with $464.9 million at December 31, 2007.
Transactional currency gains and losses arising from transactions outside of our sites’ functional currencies and changes in fair value of certain forward exchange contracts are included in our consolidated results of operationsoperations. We recognized foreign currency net gains of $16.6 million, $6.3 million and $7.5 million for the years ended December 31, 2008, 2007, by $22.2 million. An analysisand 2006, respectively, which is included in other income, net in the accompanying consolidated statements of the estimated impact by currency follows (in millions):
| | | | | |
| | | Impact on Net
| |
Currency | | Earnings | |
| |
| Euro | | $ | 12.2 | |
| Australian dollar | | | 1.4 | |
| Singapore dollar | | | 1.1 | |
| Canadian dollar | | | 1.1 | |
| Indian rupee | | | 1.1 | |
| Mexican peso | | | 0.9 | |
| British pound | | | 0.9 | |
| Chinese yuan renminbi | | | 0.6 | |
| Venezuelan bolivar | | | 0.5 | |
| Argentinean peso | | | 0.4 | |
| Brazilian real | | | 0.4 | |
| Saudi Arabian riyal | | | 0.3 | |
| Swiss franc | | | 0.3 | |
| South African rand | | | 0.2 | |
| Swedish krona | | | 0.2 | |
| Other | | | 0.6 | |
| | | | | |
| Total | | $ | 22.2 | |
| | | | | |
income.
Hedging related transactions, recorded to other comprehensive (expense) income, (expense), net of deferred taxes, are summarized below:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Other Comprehensive Income (Expense) | | | Other Comprehensive (Expense) Income | |
| | | 2007 | | 2006 | | 2005 | | | 2008 | | 2007 | | 2006 | |
| | | (Amounts in millions) | | | (Amounts in thousands) | |
| |
| Reclassification to earnings for settlements during the year: | | | | | | | | | | | | | | | | | | | | | | | | |
| Forward contracts | | $ | — | | | $ | 35 | | | $ | 125 | | |
| Forward exchange contracts | | | $ | — | | | $ | — | | | $ | 35 | |
| Interest rate swap agreements | | | 1,553 | | | | 529 | | | | 1,284 | | | | (2,863 | ) | | | 1,553 | | | | 529 | |
| Change in fair value: | | | | | | | | | | | | | | | | | | | | | | | | |
| Forward contracts | | | — | | | | — | | | | 28 | | |
| Forward exchange contracts | | | | — | | | | — | | | | — | |
| Interest rate swap agreements | | | (5,458 | ) | | | 133 | | | | 1,547 | | | | (1,243 | ) | | | (5,458 | ) | | | 133 | |
| | | | | | | | | | | | | | | |
| Year ended December 31 | | $ | (3,905 | ) | | $ | 697 | | | $ | 2,984 | | | $ | (4,106 | ) | | $ | (3,905 | ) | | $ | 697 | |
| | | | | | | | | | | | | | | |
We expect to recognize $1.5(losses) gains of $(5.3) million, $1.0$(1.8) million and $0.1 million, net of deferred taxes, into earnings in 2008, 2009, 2010 and 2010,2011, respectively, related to interest rate swap agreements based on their fair values at December 31, 2007.
We incurred foreign currency translation gains (losses) of $48.7 million, $38.9 million and $(34.8) million, in 2007, 2006 and 2005, respectively, which were recognized in other comprehensive income (expense). The currency gains in 2007 and 2006 primarily reflects the weakening of the U.S. dollar exchange rate, primarily as compared with the Euro. The currency loss in 2005 primarily reflects the strengthening of the U.S. dollar exchange rate, primarily as compared with the Euro.2008.
5659
| |
| 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 and financial statement schedule 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 (the Company) at December 31, 20072008 and 2006,2007, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 20072008 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, 2007,2008, based on criteria established inInternal Control — Integrated Frameworkissued 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’s Report on Internal Control Over Financial Reporting appearing under Item 9A. 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.
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for uncertain tax positions in 2007 changed the manner in which it accounts for share-based compensation in 2006 and changed the manner in which it accounts for defined benefit pension and other postretirement plans as of December 31, 2006.
A company’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’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’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 27, 200825, 2009
5760
FLOWSERVE CORPORATION
CONSOLIDATED BALANCE SHEETS
| | | | | | | | | |
| | | December 31, | |
| | | 2007 | | | 2006 | |
| | | (Amounts in thousands, except per share data) | |
| |
ASSETS |
| Current assets: | | | | | | | | |
| Cash and cash equivalents | | $ | 370,575 | | | $ | 67,000 | |
| Restricted cash | | | 2,663 | | | | 3,457 | |
| Accounts receivable, net | | | 666,733 | | | | 551,815 | |
| Inventories, net | | | 680,199 | | | | 547,373 | |
| Deferred taxes | | | 105,221 | | | | 95,027 | |
| Prepaid expenses and other | | | 71,380 | | | | 38,209 | |
| | | | | | | | | |
| Total current assets | | | 1,896,771 | | | | 1,302,881 | |
| Property, plant and equipment, net | | | 488,892 | | | | 442,892 | |
| Goodwill | | | 853,265 | | | | 851,123 | |
| Deferred taxes | | | 13,816 | | | | 25,731 | |
| Other intangible assets, net | | | 134,734 | | | | 143,358 | |
| Other assets, net | | | 132,943 | | | | 103,250 | |
| | | | | | | | | |
| Total assets | | $ | 3,520,421 | | | $ | 2,869,235 | |
| | | | | | | | | |
| |
| LIABILITIES AND SHAREHOLDERS’ EQUITY |
| Current liabilities: | | | | | | | | |
| Accounts payable | | $ | 513,169 | | | $ | 412,869 | |
| Accrued liabilities | | | 723,026 | | | | 458,230 | |
| Debt due within one year | | | 7,181 | | | | 8,050 | |
| Deferred taxes | | | 6,804 | | | | 4,887 | |
| | | | | | | | | |
| Total current liabilities | | | 1,250,180 | | | | 884,036 | |
| Long-term debt due after one year | | | 550,795 | | | | 556,519 | |
| Retirement obligations and other liabilities | | | 426,469 | | | | 408,094 | |
| Commitments and contingencies | | | | | | | | |
| Shareholders’ equity: | | | | | | | | |
| Common shares, $1.25 par value | | | 73,394 | | | | 73,289 | |
| Shares authorized — 120,000 | | | | | | | | |
| Shares issued — 58,715 and 58,631, respectively | | | | | | | | |
| Capital in excess of par value | | | 561,732 | | | | 543,159 | |
| Retained earnings | | | 774,366 | | | | 582,767 | |
| | | | | | | | | |
| | | | 1,409,492 | | | | 1,199,215 | |
| Treasury shares, at cost — 2,406 and 2,609 shares, respectively | | | (101,781 | ) | | | (95,262 | ) |
| Deferred compensation obligation | | | 6,650 | | | | 6,973 | |
| Accumulated other comprehensive loss | | | (21,384 | ) | | | (90,340 | ) |
| | | | | | | | | |
| Total shareholders’ equity | | | 1,292,977 | | | | 1,020,586 | |
| | | | | | | | | |
| Total liabilities and shareholders’ equity | | $ | 3,520,421 | | | $ | 2,869,235 | |
| | | | | | | | | |
See accompanying notes to consolidated financial statements.
58
FLOWSERVE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
| | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2007 | | | 2006 | | | 2005 | |
| | | (Amounts in thousands, except per share data) | |
| |
| Sales | | $ | 3,762,694 | | | $ | 3,061,063 | | | $ | 2,695,277 | |
| Cost of sales | | | (2,514,972 | ) | | | (2,053,761 | ) | | | (1,824,716 | ) |
| | | | | | | | | | | | | |
| Gross profit | | | 1,247,722 | | | | 1,007,302 | | | | 870,561 | |
| Selling, general and administrative expense | | | (856,501 | ) | | | (782,503 | ) | | | (684,271 | ) |
| Net earnings from affiliates | | | 18,695 | | | | 14,820 | | | | 12,533 | |
| | | | | | | | | | | | | |
| Operating income | | | 409,916 | | | | 239,619 | | | | 198,823 | |
| Interest expense | | | (60,119 | ) | | | (65,688 | ) | | | (74,125 | ) |
| Interest income | | | 4,324 | | | | 7,607 | | | | 3,399 | |
| Loss on early extinguishment of debt | | | (429 | ) | | | (694 | ) | | | (27,744 | ) |
| Other income (expense), net | | | 6,376 | | | | 6,432 | | | | (8,351 | ) |
| | | | | | | | | | | | | |
| Earnings before income taxes | | | 360,068 | | | | 187,276 | | | | 92,002 | |
| Provision for income taxes | | | (104,294 | ) | | | (73,238 | ) | | | (40,583 | ) |
| | | | | | | | | | | | | |
| Income from continuing operations | | | 255,774 | | | | 114,038 | | | | 51,419 | |
| Discontinued operations, net of tax | | | — | | | | — | | | | (31,846 | ) |
| Gain (loss) from sale of discontinued operations, net of tax | | | — | | | | 994 | | | | (2,499 | ) |
| | | | | | | | | | | | | |
| Net earnings | | $ | 255,774 | | | $ | 115,032 | | | $ | 17,074 | |
| | | | | | | | | | | | | |
| Net earnings per share: | | | | | | | | | | | | |
| Basic: | | | | | | | | | | | | |
| Continuing operations | | $ | 4.53 | | | $ | 2.04 | | | $ | 0.93 | |
| Discontinued operations | | | — | | | | 0.02 | | | | (0.62 | ) |
| | | | | | | | | | | | | |
| Net earnings | | $ | 4.53 | | | $ | 2.06 | | | $ | 0.31 | |
| | | | | | | | | | | | | |
| Diluted: | | | | | | | | | | | | |
| Continuing operations | | $ | 4.46 | | | $ | 2.00 | | | $ | 0.91 | |
| Discontinued operations | | | — | | | | 0.02 | | | | (0.61 | ) |
| | | | | | | | | | | | | |
| Net earnings | | $ | 4.46 | | | $ | 2.02 | | | $ | 0.30 | |
| | | | | | | | | | | | | |
| Cash dividends declared per share | | $ | 0.60 | | | $ | — | | | $ | — | |
See accompanying notes to consolidated financial statements.
59
FLOWSERVE CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
| | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2007 | | | 2006 | | | 2005 | |
| | | (Amounts in thousands) | |
| |
| Net earnings | | $ | 255,774 | | | $ | 115,032 | | | $ | 17,074 | |
| | | | | | | | | | | | | |
| Other comprehensive income (expense): | | | | | | | | | | | | |
| Foreign currency translation adjustments, net of tax | | | 48,678 | | | | 38,920 | | | | (34,846 | ) |
| Pension and other postretirement effects, net of tax | | | 24,183 | | | | 23,886 | | | | (31,881 | ) |
| Cash flow hedging activity, net of tax | | | (3,905 | ) | | | 697 | | | | 2,984 | |
| | | | | | | | | | | | | |
| Other comprehensive income (expense) | | | 68,956 | | | | 63,503 | | | | (63,743 | ) |
| | | | | | | | | | | | | |
| Comprehensive income (loss) | | $ | 324,730 | | | $ | 178,535 | | | $ | (46,669 | ) |
| | | | | | | | | | | | | |
See accompanying notes to consolidated financial statements.
60
FLOWSERVE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2007 | | | 2006 | | | 2005 | |
| | | Shares | | | Amount | | | Shares | | | Amount | | | Shares | | | Amount | |
| | | (Amounts in thousands) | |
| |
| COMMON STOCK | | | | | | | | | | | | | | | | | | | | | | | | |
| Beginning balance — January 1 | | | 58,631 | | | $ | 73,289 | | | | 57,614 | | | $ | 72,018 | | | | 57,614 | | | $ | 72,018 | |
| Stock issuance under stock option plans | | | 84 | | | | 105 | | | | 1,017 | | | | 1,271 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Ending balance — December 31 | | | 58,715 | | | $ | 73,394 | | | | 58,631 | | | $ | 73,289 | | | | 57,614 | | | $ | 72,018 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| CAPITAL IN EXCESS OF PAR VALUE | | | | | | | | | | | | | | | | | | | | | | | | |
| Beginning balance — January 1 | | | | | | $ | 543,159 | | | | | | | $ | 477,201 | | | | | | | $ | 472,180 | |
| Stock activity under stock plans | | | | | | | (19,164 | ) | | | | | | | 13,023 | | | | | | | | 7,299 | |
| Restricted stock grants | | | | | | | — | | | | | | | | — | | | | | | | | (10,087 | ) |
| Adoption of SFAS No. 123(R) | | | | | | | — | | | | | | | | 9,059 | | | | | | | | — | |
| Stock-based compensation | | | | | | | 25,306 | | | | | | | | 25,089 | | | | | | | | 7,691 | |
| Tax benefit associated with stock-based compensation | | | | | | | 12,431 | | | | | | | | 18,787 | | | | | | | | 118 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Ending balance — December 31 | | | | | | $ | 561,732 | | | | | | | $ | 543,159 | | | | | | | $ | 477,201 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| RETAINED EARNINGS | | | | | | | | | | | | | | | | | | | | | | | | |
| Beginning balance — January 1 | | | | | | $ | 582,767 | | | | | | | $ | 467,735 | | | | | | | $ | 450,661 | |
| Adoption of FIN No. 48 | | | | | | | (29,819 | ) | | | | | | | — | | | | | | | $ | — | |
| Net earnings | | | | | | | 255,774 | | | | | | | | 115,032 | | | | | | | | 17,074 | |
| Cash dividends declared | | | | | | | (34,356 | ) | | | | | | | — | | | | | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Ending balance — December 31 | | | | | | $ | 774,366 | | | | | | | $ | 582,767 | | | | | | | $ | 467,735 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| TREASURY STOCK | | | | | | | | | | | | | | | | | | | | | | | | |
| Beginning balance — January 1 | | | (2,609 | ) | | $ | (95,262 | ) | | | (1,640 | ) | | $ | (37,547 | ) | | | (2,146 | ) | | $ | (48,171 | ) |
| Repurchases of common shares | | | (707 | ) | | | (39,550 | ) | | | (1,300 | ) | | | (68,412 | ) | | | — | | | | — | |
| Adoption of SFAS No. 123(R) | | | — | | | | — | | | | (583 | ) | | | (9,059 | ) | | | — | | | | — | |
| Stock activity under stock plans | | | 910 | | | | 33,031 | | | | 914 | | | | 19,756 | | | | 506 | | | | 10,624 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Ending balance — December 31 | | | (2,406 | ) | | $ | (101,781 | ) | | | (2,609 | ) | | $ | (95,262 | ) | | | (1,640 | ) | | $ | (37,547 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| DEFERRED COMPENSATION OBLIGATION | | | | | | | | | | | | | | | | | | | | | | | | |
| Beginning balance — January 1 | | | | | | $ | 6,973 | | | | | | | $ | 4,656 | | | | | | | $ | 6,784 | |
| Increases to obligation for new deferrals | | | | | | | 416 | | | | | | | | 2,350 | | | | | | | | 723 | |
| Compensation obligations satisfied | | | | | | | (739 | ) | | | | | | | (33 | ) | | | | | | | (2,851 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Ending balance — December 31 | | | | | | $ | 6,650 | | | | | | | $ | 6,973 | | | | | | | $ | 4,656 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| ACCUMULATED OTHER COMPREHENSIVE LOSS | | | | | | | | | | | | | | | | | | | | | | | | |
| Beginning balance — January 1 | | | | | | $ | (90,340 | ) | | | | | | $ | (130,657 | ) | | | | | | $ | (66,914 | ) |
| Foreign currency translation adjustments, net of tax | | | | | | | 48,678 | | | | | | | | 38,920 | | | | | | | | (34,846 | ) |
| Pension and other postretirement effects, net of tax | | | | | | | 24,183 | | | | | | | | 23,886 | | | | | | | | (31,881 | ) |
| Adoption of SFAS No. 158, net of tax | | | | | | | — | | | | | | | | (23,186 | ) | | | | | | | — | |
| Cash flow hedging activity, net of tax | | | | | | | (3,905 | ) | | | | | | | 697 | | | | | | | | 2,984 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Ending balance — December 31 | | | | | | $ | (21,384 | ) | | | | | | $ | (90,340 | ) | | | | | | $ | (130,657 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| TOTAL SHAREHOLDERS’ EQUITY | | | | | | | | | | | | | | | | | | | | | | | | |
| Beginning balance — January 1 | | | 56,022 | | | $ | 1,020,586 | | | | 55,974 | | | $ | 853,406 | | | | 55,468 | | | $ | 886,558 | |
| Net changes in shareholders’ equity | | | 287 | | | | 272,391 | | | | 48 | | | | 167,180 | | | | 506 | | | | (33,152 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Ending balance — December 31 | | | 56,309 | | | $ | 1,292,977 | | | | 56,022 | | | $ | 1,020,586 | | | | 55,974 | | | $ | 853,406 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | |
| | | December 31, | |
| | | 2008 | | | 2007 | |
| | | (Amounts in thousands, except per share data) | |
| |
ASSETS |
| Current assets: | | | | | | | | |
| Cash and cash equivalents | | $ | 471,792 | | | $ | 370,575 | |
| Restricted cash | | | 264 | | | | 2,663 | |
| Accounts receivable, net | | | 808,522 | | | | 666,733 | |
| Inventories, net | | | 834,612 | | | | 680,199 | |
| Deferred taxes | | | 126,890 | | | | 105,221 | |
| Prepaid expenses and other | | | 90,345 | | | | 71,380 | |
| | | | | | | | | |
| Total current assets | | | 2,332,425 | | | | 1,896,771 | |
| Property, plant and equipment, net | | | 547,235 | | | | 488,892 | |
| Goodwill | | | 828,395 | | | | 853,265 | |
| Deferred taxes | | | 32,561 | | | | 13,816 | |
| Other intangible assets, net | | | 121,919 | | | | 134,734 | |
| Other assets, net | | | 161,159 | | | | 132,943 | |
| | | | | | | | | |
| Total assets | | $ | 4,023,694 | | | $ | 3,520,421 | |
| | | | | | | | | |
| |
LIABILITIES AND SHAREHOLDERS’ EQUITY |
| Current liabilities: | | | | | | | | |
| Accounts payable | | $ | 598,498 | | | $ | 513,169 | |
| Accrued liabilities | | | 967,099 | | | | 723,026 | |
| Debt due within one year | | | 27,731 | | | | 7,181 | |
| Deferred taxes | | | 14,668 | | | | 6,804 | |
| | | | | | | | | |
| Total current liabilities | | | 1,607,996 | | | | 1,250,180 | |
| Long-term debt due after one year | | | 545,617 | | | | 550,795 | |
| Retirement obligations and other liabilities | | | 502,314 | | | | 426,469 | |
| Commitments and contingencies | | | | | | | | |
| Shareholders’ equity: | | | | | | | | |
| Common shares, $1.25 par value | | | 73,477 | | | | 73,394 | |
| Shares authorized — 120,000 Shares issued — 58,781 and 58,715, respectively | | | | | | | | |
| Capital in excess of par value | | | 586,371 | | | | 561,732 | |
| Retained earnings | | | 1,159,634 | | | | 774,366 | |
| | | | | | | | | |
| | | | 1,819,482 | | | | 1,409,492 | |
| Treasury shares, at cost — 3,566 and 2,406 shares, respectively | | | (248,073 | ) | | | (101,781 | ) |
| Deferred compensation obligation | | | 7,678 | | | | 6,650 | |
| Accumulated other comprehensive loss | | | (211,320 | ) | | | (21,384 | ) |
| | | | | | | | | |
| Total shareholders’ equity | | | 1,367,767 | | | | 1,292,977 | |
| | | | | | | | | |
| Total liabilities and shareholders’ equity | | $ | 4,023,694 | | | $ | 3,520,421 | |
| | | | | | | | | |
See accompanying notes to consolidated financial statements.
61
FLOWSERVE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWSINCOME
| | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2007 | | | 2006 | | | 2005 | |
| | | (Amounts in thousands) | |
| |
| Cash flows — Operating activities: | | | | | | | | | | | | |
| Net earnings | | $ | 255,774 | | | $ | 115,032 | | | $ | 17,074 | |
| Adjustments to reconcile net earnings to net cash provided by operating activities: | | | | | | | | | | | | |
| Depreciation | | | 67,836 | | | | 60,498 | | | | 59,845 | |
| Amortization of intangible and other assets | | | 9,875 | | | | 10,498 | | | | 10,043 | |
| Amortization of deferred loan costs | | | 1,752 | | | | 1,718 | | | | 3,594 | |
| Write-off of unamortized deferred loan costs and discount | | | 429 | | | | 694 | | | | 11,307 | |
| Loss on early extinguishment of debt | | | — | | | | — | | | | 16,437 | |
| Net (gain) loss on the disposition of assets | | | (7,613 | ) | | | 1,444 | | | | 2,039 | |
| Excess tax benefits from stock-based payment arrangements | | | (11,936 | ) | | | (17,406 | ) | | | — | |
| (Gain) loss on sale of discontinued operations | | | — | | | | (1,656 | ) | | | 3,814 | |
| Impairment of assets | | | — | | | | — | | | | 30,067 | |
| Stock-based compensation | | | 25,345 | | | | 25,089 | | | | 13,796 | |
| Net earnings from affiliates, net of dividends received | | | (10,616 | ) | | | (6,663 | ) | | | (7,779 | ) |
| Change in assets and liabilities, net of acquisitions: | | | | | | | | | | | | |
| Accounts receivable, net | | | (82,372 | ) | | | (40,826 | ) | | | (37,192 | ) |
| Inventories, net | | | (101,783 | ) | | | (98,364 | ) | | | (20,603 | ) |
| Prepaid expenses and other | | | (26,568 | ) | | | (6,548 | ) | | | 3,648 | |
| Other assets, net | | | (9,790 | ) | | | (8,905 | ) | | | 3,798 | |
| Accounts payable | | | 75,200 | | | | 58,736 | | | | 28,831 | |
| Accrued liabilities and income taxes payable | | | 230,559 | | | | 76,690 | | | | 47,644 | |
| Retirement obligations and other liabilities | | | 18,956 | | | | (11,365 | ) | | | (31,353 | ) |
| Net deferred taxes | | | (17,683 | ) | | | 4,520 | | | | (27,565 | ) |
| | | | | | | | | | | | | |
| Net cash flows provided by operating activities | | | 417,365 | | | | 163,186 | | | | 127,445 | |
| | | | | | | | | | | | | |
| Cash flows — Investing activities: | | | | | | | | | | | | |
| Capital expenditures | | | (88,975 | ) | | | (73,528 | ) | | | (49,271 | ) |
| Proceeds from sale of discontinued operations | | | — | | | | 3,656 | | | | 13,590 | |
| Proceeds from disposal of assets | | | 13,404 | | | | — | | | | — | |
| Payments for acquisitions, net of cash acquired | | | (2,312 | ) | | | (7,978 | ) | | | — | |
| Change in restricted cash | | | 794 | | | | 171 | | | | (3,628 | ) |
| | | | | | | | | | | | | |
| Net cash flows used by investing activities | | | (77,089 | ) | | | (77,679 | ) | | | (39,309 | ) |
| | | | | | | | | | | | | |
| Cash flows — Financing activities: | | | | | | | | | | | | |
| Proceeds from issuance of long-term debt | | | — | | | | — | | | | 600,000 | |
| Excess tax benefits from stock-based payment arrangements | | | 11,936 | | | | 17,406 | | | | — | |
| Payments on long-term debt | | | (2,841 | ) | | | (105,281 | ) | | | (21,500 | ) |
| Payment of deferred loan costs | | | (1,399 | ) | | | — | | | | (9,322 | ) |
Repurchase of Term Loans Senior and Subordinated Notes
(includes premiums paid of $16.5 million) | | | — | | | | — | | | | (607,043 | ) |
| Net payments under other financing arrangements | | | (3,751 | ) | | | (3,412 | ) | | | (16,519 | ) |
| Repurchase of common shares | | | (44,798 | ) | | | (63,165 | ) | | | — | |
| Payments of dividends | | | (25,681 | ) | | | — | | | | — | |
| Proceeds from stock option activity | | | 16,693 | | | | 39,915 | | | | 1,111 | |
| | | | | | | | | | | | | |
| Net cash flows used by financing activities | | | (49,841 | ) | | | (114,537 | ) | | | (53,273 | ) |
| Effect of exchange rate changes on cash | | | 13,140 | | | | 3,166 | | | | (5,758 | ) |
| | | | | | | | | | | | | |
| Net change in cash and cash equivalents | | | 303,575 | | | | (25,864 | ) | | | 29,105 | |
| Cash and cash equivalents at beginning of year | | | 67,000 | | | | 92,864 | | | | 63,759 | |
| | | | | | | | | | | | | |
| Cash and cash equivalents at end of year | | $ | 370,575 | | | $ | 67,000 | | | $ | 92,864 | |
| | | | | | | | | | | | | |
| Income taxes paid (net of refunds) | | $ | 64,663 | | | $ | 65,825 | | | $ | 40,698 | |
| Interest paid | | $ | 59,550 | | | $ | 63,866 | | | $ | 72,987 | |
| Non-cash financing of fixed assets | | $ | — | | | $ | 8,041 | | | $ | — | |
| | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2008 | | | 2007 | | | 2006 | |
| | | (Amounts in thousands, except per share data) | |
| |
| Sales | | $ | 4,473,473 | | | $ | 3,762,694 | | | $ | 3,061,063 | |
| Cost of sales | | | (2,893,161 | ) | | | (2,514,972 | ) | | | (2,053,761 | ) |
| | | | | | | | | | | | | |
| Gross profit | | | 1,580,312 | | | | 1,247,722 | | | | 1,007,302 | |
| Selling, general and administrative expense | | | (984,403 | ) | | | (856,501 | ) | | | (782,503 | ) |
| Net earnings from affiliates | | | 16,963 | | | | 18,695 | | | | 14,820 | |
| | | | | | | | | | | | | |
| Operating income | | | 612,872 | | | | 409,916 | | | | 239,619 | |
| Interest expense | | | (51,293 | ) | | | (60,119 | ) | | | (65,688 | ) |
| Interest income | | | 8,392 | | | | 4,324 | | | | 7,607 | |
| Other income, net | | | 20,163 | | | | 5,947 | | | | 5,738 | |
| | | | | | | | | | | | | |
| Earnings before income taxes | | | 590,134 | | | | 360,068 | | | | 187,276 | |
| Provision for income taxes | | | (147,721 | ) | | | (104,294 | ) | | | (73,238 | ) |
| | | | | | | | | | | | | |
| Income from continuing operations | | | 442,413 | | | | 255,774 | | | | 114,038 | |
| Gain from sale of discontinued operations, net of tax | | | — | | | | — | | | | 994 | |
| | | | | | | | | | | | | |
| Net earnings | | $ | 442,413 | | | $ | 255,774 | | | $ | 115,032 | |
| | | | | | | | | | | | | |
| Net earnings per share: | | | | | | | | | | | | |
| Basic: | | | | | | | | | | | | |
| Continuing operations | | $ | 7.82 | | | $ | 4.53 | | | $ | 2.04 | |
| Discontinued operations | | | — | | | | — | | | | 0.02 | |
| | | | | | | | | | | | | |
| Net earnings | | $ | 7.82 | | | $ | 4.53 | | | $ | 2.06 | |
| | | | | | | | | | | | | |
| Diluted: | | | | | | | | | | | | |
| Continuing operations | | $ | 7.74 | | | $ | 4.46 | | | $ | 2.00 | |
| Discontinued operations | | | — | | | | — | | | | 0.02 | |
| | | | | | | | | | | | | |
| Net earnings | | $ | 7.74 | | | $ | 4.46 | | | $ | 2.02 | |
| | | | | | | | | | | | | |
| Cash dividends declared per share | | $ | 1.00 | | | $ | 0.60 | | | $ | — | |
See accompanying notes to consolidated financial statements.
62
FLOWSERVE CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2008 | | | 2007 | | | 2006 | |
| | | (Amounts in thousands) | |
| |
| Net earnings | | $ | 442,413 | | | $ | 255,774 | | | $ | 115,032 | |
| | | | | | | | | | | | | |
| Other comprehensive (expense) income: | | | | | | | | | | | | |
| Foreign currency translation adjustments, net of tax | | | (125,853 | ) | | | 48,678 | | | | 38,920 | |
| Pension and other postretirement effects, net of tax | | | (59,977 | ) | | | 24,183 | | | | 23,886 | |
| Cash flow hedging activity, net of tax | | | (4,106 | ) | | | (3,905 | ) | | | 697 | |
| | | | | | | | | | | | | |
| Other comprehensive (expense) income | | | (189,936 | ) | | | 68,956 | | | | 63,503 | |
| | | | | | | | | | | | | |
| Comprehensive income | | $ | 252,477 | | | $ | 324,730 | | | $ | 178,535 | |
| | | | | | | | | | | | | |
See accompanying notes to consolidated financial statements.
63
FLOWSERVE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Capital
| | | | | | | | | | | | | | | Accumulated
| | | | |
| | | | | | | | | in Excess
| | | | | | | | | | | | Deferred
| | | Other
| | | Total
| |
| | | Common Stock | | | of Par
| | | Retained
| | | Treasury Stock | | | Compensation
| | | Comprehensive
| | | Shareholders’
| |
| | | Shares | | | Amount | | | Value | | | Earnings | | | Shares | | | Amount | | | Obligation | | | Loss | | | Equity | |
| | | (Amounts in thousands) | |
| |
Balance — January 1, 2006 | | | 57,614 | | | $ | 72,018 | | | $ | 477,201 | | | $ | 467,735 | | | | (1,640 | ) | | $ | (37,547 | ) | | $ | 4,656 | | | $ | (130,657 | ) | | $ | 853,406 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Stock activity under stock plans | | | 1,017 | | | | 1,271 | | | | 13,023 | | | | — | | | | 914 | | | | 19,756 | | | | — | | | | — | | | | 34,050 | |
| Adoption of SFAS No. 123R | | | — | | | | — | | | | 9,059 | | | | — | | | | (583 | ) | | | (9,059 | ) | | | — | | | | — | | | | — | |
| Stock-based compensation | | | — | | | | — | | | | 25,089 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 25,089 | |
| Tax benefit associated with stock-based compensation | | | — | | | | — | | | | 18,787 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 18,787 | |
| Net earnings | | | — | | | | — | | | | — | | | | 115,032 | | | | — | | | | — | | | | — | | | | — | | | | 115,032 | |
| Repurchase of common shares | | | — | | | | — | | | | — | | | | — | | | | (1,300 | ) | | | (68,412 | ) | | | — | | | | — | | | | (68,412 | ) |
| Increases to obligation for new deferrals | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 2,350 | | | | — | | | | 2,350 | |
| Compensation obligations satisfied | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (33 | ) | | | — | | | | (33 | ) |
| Foreign currency translation adjustments, net of tax | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 38,920 | | | | 38,920 | |
| Pension and other postretirement effects, net of tax | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 23,886 | | | | 23,886 | |
| Adoption of SFAS No. 158, net of tax | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (23,186 | ) | | | (23,186 | ) |
| Cash flow hedging activity, net of tax | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 697 | | | | 697 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance — December 31, 2006 | | | 58,631 | | | $ | 73,289 | | | $ | 543,159 | | | $ | 582,767 | | | | (2,609 | ) | | $ | (95,262 | ) | | $ | 6,973 | | | $ | (90,340 | ) | | $ | 1,020,586 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Stock activity under stock plans | | | 84 | | | | 105 | | | | (19,164 | ) | | | — | | | | 910 | | | | 33,031 | | | | — | | | | — | | | | 13,972 | |
| Stock-based compensation | | | — | | | | — | | | | 25,306 | | | | 40 | | | | — | | | | — | | | | — | | | | — | | | | 25,346 | |
| Tax benefit associated with stock-based compensation | | | — | | | | — | | | | 12,431 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 12,431 | |
| Adoption of FIN No. 48 | | | — | | | | — | | | | — | | | | (29,819 | ) | | | — | | | | — | | | | — | | | | — | | | | (29,819 | ) |
| Net earnings | | | — | | | | — | | | | — | | | | 255,774 | | | | — | | | | — | | | | — | | | | — | | | | 255,774 | |
| Cash dividends declared | | | — | | | | — | | | | — | | | | (34,396 | ) | | | — | | | | — | | | | — | | | | — | | | | (34,396 | ) |
| Repurchase of common shares | | | — | | | | — | | | | — | | | | — | | | | (707 | ) | | | (39,550 | ) | | | — | | | | — | | | | (39,550 | ) |
| Increases to obligation for new deferrals | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 416 | | | | — | | | | 416 | |
| Compensation obligations satisfied | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (739 | ) | | | — | | | | (739 | ) |
| Foreign currency translation adjustments, net of tax | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 48,678 | | | | 48,678 | |
| Pension and other postretirement effects, net of tax | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 24,183 | | | | 24,183 | |
| Cash flow hedging activity, net of tax | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (3,905 | ) | | | (3,905 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance — December 31, 2007 | | | 58,715 | | | $ | 73,394 | | | $ | 561,732 | | | $ | 774,366 | | | | (2,406 | ) | | $ | (101,781 | ) | | $ | 6,650 | | | $ | (21,384 | ) | | $ | 1,292,977 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Stock activity under stock plans | | | 66 | | | | 83 | | | | (20,200 | ) | | | — | | | | 581 | | | | 18,658 | | | | — | | | | — | | | | (1,459 | ) |
| Stock-based compensation | | | — | | | | — | | | | 32,642 | | | | 61 | | | | — | | | | — | | | | — | | | | — | | | | 32,703 | |
| Tax benefit associated with stock-based compensation | | | — | | | | — | | | | 12,197 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 12,197 | |
| Net earnings | | | — | | | | — | | | | — | | | | 442,413 | | | | — | | | | — | | | | — | | | | — | | | | 442,413 | |
| Cash dividends declared | | | — | | | | — | | | | — | | | | (57,206 | ) | | | — | | | | — | | | | — | | | | — | | | | (57,206 | ) |
| Repurchase of common shares | | | — | | | | — | | | | — | | | | — | | | | (1,741 | ) | | | (164,950 | ) | | | — | | | | — | | | | (164,950 | ) |
| Increases to obligation for new deferrals | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,544 | | | | — | | | | 1,544 | |
| Compensation obligations satisfied | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (516 | ) | | | — | | | | (516 | ) |
| Foreign currency translation adjustments, net of tax | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (125,853 | ) | | | (125,853 | ) |
| Pension and other postretirement effects, net of tax | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (59,977 | ) | | | (59,977 | ) |
| Cash flow hedging activity, net of tax | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (4,106 | ) | | | (4,106 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance — December 31, 2008 | | | 58,781 | | | $ | 73,477 | | | $ | 586,371 | | | $ | 1,159,634 | | | | (3,566 | ) | | $ | (248,073 | ) | | $ | 7,678 | | | $ | (211,320 | ) | | $ | 1,367,767 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
See accompanying notes to consolidated financial statements.
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FLOWSERVE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2008 | | | 2007 | | | 2006 | |
| | | (Amounts in thousands) | |
| |
| Cash flows — Operating activities: | | | | | | | | | | | | |
| Net earnings | | $ | 442,413 | | | $ | 255,774 | | | $ | 115,032 | |
| Adjustments to reconcile net earnings to net cash provided by operating activities: | | | | | | | | | | | | |
| Depreciation | | | 71,584 | | | | 67,836 | | | | 60,498 | |
| Amortization of intangible and other assets | | | 9,858 | | | | 9,875 | | | | 10,498 | |
| Amortization of deferred loan costs | | | 1,822 | | | | 1,752 | | | | 1,718 | |
| Write-off of unamortized deferred loan costs and discount | | | — | | | | 429 | | | | 694 | |
| Net (gain) loss on the disposition of assets | | | (5,688 | ) | | | (7,613 | ) | | | 1,444 | |
| Gain on bargain purchase | | | (2,809 | ) | | | — | | | | — | |
| Excess tax benefits from stock-based payment arrangements | | | (12,531 | ) | | | (11,936 | ) | | | (17,406 | ) |
| Loss on sale of discontinued operations | | | | | | | — | | | | (1,656 | ) |
| Stock-based compensation | | | 32,703 | | | | 25,345 | | | | 25,089 | |
| Net earnings from affiliates, net of dividends received | | | (8,519 | ) | | | (10,616 | ) | | | (6,663 | ) |
| Change in assets and liabilities, net of acquisitions: | | | | | | | | | | | | |
| Accounts receivable, net | | | (195,097 | ) | | | (82,372 | ) | | | (40,826 | ) |
| Inventories, net | | | (195,529 | ) | | | (101,783 | ) | | | (98,364 | ) |
| Prepaid expenses and other | | | (21,664 | ) | | | (26,568 | ) | | | (6,548 | ) |
| Other assets, net | | | (18,179 | ) | | | (9,790 | ) | | | (8,905 | ) |
| Accounts payable | | | 99,768 | | | | 75,200 | | | | 58,736 | |
| Accrued liabilities and income taxes payable | | | 228,944 | | | | 230,559 | | | | 76,690 | |
| Retirement obligations and other liabilities | | | 31,542 | | | | 18,956 | | | | (11,365 | ) |
| Net deferred taxes | | | (52,593 | ) | | | (17,683 | ) | | | 4,520 | |
| | | | | | | | | | | | | |
| Net cash flows provided by operating activities | | | 406,025 | | | | 417,365 | | | | 163,186 | |
| | | | | | | | | | | | | |
| Cash flows — Investing activities: | | | | | | | | | | | | |
| Capital expenditures | | | (126,932 | ) | | | (88,975 | ) | | | (73,528 | ) |
| Proceeds from sale of discontinued operations | | | — | | | | — | | | | 3,656 | |
| Proceeds from disposal of assets | | | 7,311 | | | | 13,404 | | | | — | |
| Payments for acquisitions, net of cash acquired | | | — | | | | (2,312 | ) | | | (7,978 | ) |
| Change in restricted cash | | | 2,399 | | | | 794 | | | | 171 | |
| | | | | | | | | | | | | |
| Net cash flows used by investing activities | | | (117,222 | ) | | | (77,089 | ) | | | (77,679 | ) |
| | | | | | | | | | | | | |
| Cash flows — Financing activities: | | | | | | | | | | | | |
| Excess tax benefits from stock-based payment arrangements | | | 12,531 | | | | 11,936 | | | | 17,406 | |
| Payments on long-term debt | | | (5,682 | ) | | | (2,841 | ) | | | (105,281 | ) |
| Payment of deferred loan costs | | | — | | | | (1,399 | ) | | | — | |
| Net borrowings (payments) under other financing arrangements | | | 14,938 | | | | (3,751 | ) | | | (3,412 | ) |
| Repurchase of common shares | | | (164,950 | ) | | | (44,798 | ) | | | (63,165 | ) |
| Payments of dividends | | | (51,481 | ) | | | (25,681 | ) | | | — | |
| Proceeds from stock option activity | | | 11,940 | | | | 16,693 | | | | 39,915 | |
| | | | | | | | | | | | | |
| Net cash flows used by financing activities | | | (182,704 | ) | | | (49,841 | ) | | | (114,537 | ) |
| Effect of exchange rate changes on cash | | | (4,882 | ) | | | 13,140 | | | | 3,166 | |
| | | | | | | | | | | | | |
| Net change in cash and cash equivalents | | | 101,217 | | | | 303,575 | | | | (25,864 | ) |
| Cash and cash equivalents at beginning of year | | | 370,575 | | | | 67,000 | | | | 92,864 | |
| | | | | | | | | | | | | |
| Cash and cash equivalents at end of year | | $ | 471,792 | | | $ | 370,575 | | | $ | 67,000 | |
| | | | | | | | | | | | | |
| Income taxes paid (net of refunds) | | $ | 112,545 | | | $ | 64,663 | | | $ | 65,825 | |
| Interest paid | | | 49,634 | | | | 59,550 | | | | 63,866 | |
| Non-cash financing of fixed assets | | | — | | | | — | | | | 8,041 | |
See accompanying notes to consolidated financial statements.
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FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 20072008 AND 20062007 AND FOR THE
THREE YEARS ENDED DECEMBER 31, 20072008
| |
| 1. | SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING DEVELOPMENTS |
We produce engineered and industrial pump and pump systems, engineered and industrial valves, control valves, actuators, controls, mechanical seals, auxiliary systems and provide a range of related flow management services worldwide, primarily for the process industries. 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 of the oil and gas, chemical, power, water and other 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.
Certain reclassifications have been made to prior period amounts to conform with the current period presentation.
Principles of Consolidation — The consolidated financial statements include the accounts of our company and our wholly and majority-owned subsidiaries. In addition, we consolidate any variable interest entities for which we are deemed to be the primary beneficiary. Minority interests of non-affiliated parties have been recognized for all majority-owned consolidated subsidiaries. Intercompany profits, transactions and balances among consolidated entities have been eliminated from our consolidated financial statements. Investments in unconsolidated affiliated companies, which represent non-controlling 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 United States of America (“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 annually for impairment.
Use of Estimates — The process of preparing financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts of certain assets, liabilities, revenues and expenses. Management believes its estimates and assumptions are reasonable; however, actual results may differ materially from such estimates. The most significant estimates and assumptions made by management 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 contingencies;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 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 collectibility. For contracts containing multiple elements, each having a determinable fair value, we recognize revenue in an amount equal to the element’s pro rata share of the contract’s fair value in accordance with the contractual delivery terms for each element. 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.
Revenues for long-term contracts, which include 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 14% of our consolidated sales for each year presented.
6366
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
the percentage of completion method with progress measured on a cost-to-cost basis. Percentage of completion revenue represents less than 10% 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 less than 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, which would adversely affect our results of operations and financial position. In circumstances where the total projected reduced revenues still exceed total projected costs, the incurrence of unrealized incentive fees 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.
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.
Restricted cash represents cash restricted by our factoring agreements in 2007 and certain contracts in which a small portion of payments received under progress billings is not available for use until the project reaches completion.
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, credit reports and customer financial condition. 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 performing creditworthiness analyses on such customers. As of December 31, 2007,2008, and 2006,2007, 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 thefirst-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
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FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
tax attributes through a review of past, current and estimated future taxable income and establishment of tax strategies. These estimates could be impacted by changes in the amount and geographical source of future income and the results of implementation or alteration of tax planning strategies.
Statement of Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes,” requires us toWe provide deferred taxes for the temporary differences associated with our investment in foreign subsidiaries that
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FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
have a financial reporting basis that exceeds tax basis, unless we can assert permanent reinvestment in foreign jurisdictions pursuant to Accounting Principles Board Opinion (“APB”) No. 23, “Accounting for Income Taxes — Special Areas.”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. We do not assert permanent reinvestment under APB No. 23 for these basis differences.on our unremitted foreign earnings. However, we do assert permanent reinvestment on certain portions of our initial invested capital in various foreign subsidiaries. During each of the three years reported in the period ended December 31, 2007,2008, we have not recognized any net deferred tax assets attributable to unremitted earnings or foreign currency translation adjustments in our foreign subsidiaries due to estimated excess foreign tax credits and other attributes.
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.
On January 1, 2007, we adopted Financial Accounting Standards Board (“FASB”) Financial Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109,” which addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FIN No. 48, we may 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.
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. FIN No. 48 also provides guidance on derecognition, classification, interest and penalties on income taxes and accounting in interim periods and requires increased disclosures.periods.
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.
Legal and Environmental Accruals — Legal and environmental reserves are recorded based upon acase-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. These estimates may change in the future due to new developments regarding the facts and circumstances of each matter.
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, 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 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
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FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
balance sheets. Changes in claims filed, settled and dismissed and differences between actual and estimated settlement costs and insurance or indemnity recoveries could impact future expense.
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. Changes in claim rates, differences between actual and expected warranty costs, and sales trends and facility rationalization activities could impact warranty obligation estimates, which might have adverse effects on our consolidated results of operations and financial position.
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.factors 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. Changes in claims and differences between actual and expected claim losses could impact future accruals.
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FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 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.
RetirementPension and Postretirement Obligations — Determination of retirement and postretirement benefits obligations is based on estimates made by management in consultation with independent actuaries and investment advisors. Inherent in these valuations are key assumptions including discount rates, expected rates of return on plan assets, life expectancyretirement rates, mortality rates and assumed rates of compensation increase in wages or in health care costs.and other factors. Current market conditions, including changes in rates of return, interest rates and medical inflation rates, are considered in selecting these assumptions.
Prior to December 31, 2006, actuarial gains and losses and prior service costs were disclosed, but not recognized in our consolidated balance sheets. Upon adoption of SFASStatement of Financial Accounting Standards (“SFAS”) No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106, and 132(R),” effective December 31, 2006, we began recognizing these costs in our consolidated balance sheets through an adjustment to accumulated other comprehensive loss. Effective January 1, 2007, we recognize actuarial gains and losses and prior service costs in accumulated other comprehensive loss as they arise.
Valuation of Goodwill, Indefinite-Lived Intangible Assets and Other Long-Lived Assets— The value of goodwill and indefinite-lived intangible assets is tested annually for impairment at December 31 or whenever events or circumstances indicate such assets may be impaired. Impairment for goodwill and indefinite-lived intangibles is assessed at the reporting unit level, which correlates to our operating segments. We consider each of our operating segments to constitute a business with discrete financial information that management regularly reviews. The net realizable value of other long-lived assets, including property, plant and equipment, is reviewed periodically, when indicators of potential impairment conditions are present, based upon an assessment of the estimated future cash flows related to those assets.
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 theincome from operations for the period. Depreciation is computed by
69
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
the straight-line method based on the estimated useful lives of the depreciable assets. Generally, the estimated useful lives of the assets are:
| | | | | |
| Buildings and improvements | | | 10 to 40 years | |
| Furniture and fixtures | | | 3 to 7 years | |
| Machinery and equipment | | | 3 to 12 years | |
| Capital leases (based on lease term) | | | 3 to 25 years | |
Costs related to routine repairs and maintenance are expensed as incurred.
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, distribution networks, software, patents and other items that are being amortized over their estimated useful lives generally ranging from 3 to 40 years. These assets are reviewed for impairment whenever events and circumstances indicate impairment may have occurred.
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 — The carrying amounts of our financial instruments approximate fair value at December 31, 20072008, except for our Term Loan. The interbank market for our Term Loan implied a fair value of approximately $495 million at December 31, 2008, as compared with a carrying value of $549.7 million. We believe this is reflective of the general global economic conditions as of December 31, 2008. Although the fair value of our Term Loan is less than the carrying value, settlement at the reported fair value may not be possible or may not be prudent after our consideration of the other intended uses of cash balances and 2006.future cash flows. The carrying amounts of our financial instruments approximated fair value at December 31, 2007.
Derivatives and Hedging Activities — As part of our risk management strategy, we enter into derivative contracts to mitigate certain financial risks related to foreign currencies and interest rates. We have a risk-
66
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
managementrisk-management and derivatives policy outlining the conditions under which we can enter into financial derivative transactions.
We employ a foreign currency economic hedging strategy to minimize potential losses in earnings or cash flows from unfavorable foreign currency exchange rate movements. This strategy also minimizes potential gains from favorable exchange rate movements. Foreign currency exposures arise from transactions, including firm commitments and anticipated transactions, denominated in a currency other than an entity’s functional currency and from translation of foreign-denominated assets and liabilities into U.S. dollars. The primary currencies in which we operate, in addition to the U.S. dollar, are the Euro, British pound,Argentina peso, Australian dollar, Canadian dollar, Brazilian real, British pound, Canadian dollar, Chinese yuan, Colombian peso, Euro, Indian rupee, Japanese yen, Mexican peso, Singapore dollar and Swedish krona, Indian rupee and Colombian peso.krona. We enter into interest rate swap agreements for the purpose of hedging our exposure to floating interest rates on certain portions of our debt.
Our policy to achieve hedge accounting treatment requires us to document all relationships between hedging instruments and hedged items, our risk management objective and strategy for entering into hedges and whether we intend to designate a formal hedge accounting relationship. This process includes linking all derivatives that are designated in a formal hedge accounting relationship as fair value, cash flow or foreign currency hedges of (1) specific assets and liabilities on the balance sheet or (2) specific firm commitments or forecasted transactions. In cases where we designate a hedge, we assess (both at the inception of the 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
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FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
whether those derivatives may be expected to remain highly effective in future periods. Failure to demonstrate effectiveness in offsetting exposures retroactively or prospectively would cause us to deem the hedge ineffective.
All derivatives are recognized on the balance sheet at their fair values. For derivatives that do not qualify for hedge accounting or for which we have not elected to apply hedge accounting, which includes substantially all of our forward exchange contracts, the changes in the fair values of these derivatives are recognized in other income (expense), net in the consolidated statements of income.
At the inception of a new derivative contract for which formal hedge accounting has been elected, our policy requires us to designate the derivative as (1) a hedge of (a) a forecasted transaction or (b) the variability of cash flows that are to be received or paid in connection with a recognized asset or liability (a “cash flow” hedge); or (2) a foreign currency fair value (a “foreign currency”) hedge. 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, are recorded in other comprehensive income (loss), until earnings are affected by the variability of cash flows of the hedged transaction. Changes in the fair value of foreign currency hedges are recorded in other comprehensive income (loss) since they satisfy the accounting criteria for a cash flow hedge. Any hedge ineffectiveness (which represents the amount by which the changes in the fair value of the derivative do not mirror the change in the cash flow of the forecasted transaction) is recorded in current period earnings. For effective hedges, the changes in the value of the hedged item are also recorded as a component of other comprehensive income (loss), if the underlying has been recognized on the balance sheet. Upon settlement, realized gains and losses are recognized in other income (expense), net in the consolidated statements of income.
We discontinue hedge accounting when:
| | |
| | • | we deem the hedge to be ineffective and determine that the designation of the derivative as a hedging instrument is no longer appropriate; |
| |
| | • | the derivative no longer effectively offsets changes in the cash flows of a hedged item (such as firm commitments or contracts); |
| |
| | • | the derivative expires, terminates or is sold; or |
| |
| | • | 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
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FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 the 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.
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 generally reported as a component of accumulated other comprehensive loss.
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. See Note 8 for further discussion of these forward exchange contracts.
71
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Transactional currency gains and losses arising from transactions in currencies other than our sites’ functional currencies and changes in fair value of forward exchange contracts that do not qualify for hedge accounting are included in our consolidated results of operations. For the years ended December 31, 2008, 2007 2006 and 2005,2006, we recognized gains (losses) of $16.6 million, $6.3 million, $7.5 million, and $(7.0)$7.5 million of such amounts in other income, (expense), net in the accompanying consolidated statements of income.
Stock-Based Compensation — Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS No. 123(R), “Share-Based Payment,” using the modified prospective application method, and therefore, have not retrospectively adjusted results for prior periods. Under this method, stock-basedStock-based compensation expense for the periods presented include compensation expense for all stock-based compensation awards granted prior to, but not yet vestedis measured at the date of adoption, based on the grant — date fair value estimated in accordance with the original provisions of SFAS No. 123, “Accounting for Stock-Based Compensation.” Stock-based compensation expense for all stock-based compensation awards granted after the date of adoption is based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R).value. It is our policy to set the exercise price of stock optionsoption awards and the value of restricted share, restricted share unit and performance-based unit awards (collectively referred to as “Restricted Shares”) at the closing price of our common stock on the New York Stock Exchange on the date of grant, 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.
Options are expensed using the graded vesting model, whereby we recognize compensation cost over the requisite service period for each separately vesting tranche of the award. In accordance with SFAS No. 123(R), weWe adjust share-based compensation at least annually for changes to the estimate of expected equity award forfeitures based on actual forfeiture experience.
In conjunction 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 the adoption of SFAS No. 123(R), we selected the alternative transition methodoriginal total Restricted Shares granted over a4-year period, excluding significant forfeiture events that are not expected to determine the net excess tax benefits that would have qualified as such as of January 1, 2006. See Note 7 for further discussion on stock-based compensation.
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FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)recur.
Earnings Per Share — Basic and diluted earnings per share are calculated as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | | Year Ended December 31, | |
| | | 2007 | | 2006 | | 2005 | | | 2008 | | 2007 | | 2006 | |
| | | (Amounts in thousands, except per share amounts) | | | (Amounts in thousands, except per share amounts) | |
| |
| Income from continuing operations | | $ | 255,774 | | | $ | 114,038 | | | $ | 51,419 | | | $ | 442,413 | | | $ | 255,774 | | | $ | 114,038 | |
| | | | | | | | | | | | | | | |
| Net earnings | | $ | 255,774 | | | $ | 115,032 | | | $ | 17,074 | | | $ | 442,413 | | | $ | 255,774 | | | $ | 115,032 | |
| | | | | | | | | | | | | | | |
| Denominator for basic earnings per share — weighted average shares | | | 56,449 | | | | 55,963 | | | | 55,473 | | | | 56,601 | | | | 56,449 | | | | 55,963 | |
| Effect of potentially dilutive securities | | | 840 | | | | 942 | | | | 1,217 | | | | 579 | | | | 840 | | | | 942 | |
| | | | | | | | | | | | | | | |
| Denominator for diluted earnings per share — weighted average shares | | | 57,289 | | | | 56,905 | | | | 56,690 | | | | 57,180 | | | | 57,289 | | | | 56,905 | |
| | | | | | | | | | | | | | | |
| Net earnings per share: | | | | | | | | | | | | | | | | | | | | | | | | |
| Basic: | | | | | | | | | | | | | | | | | | | | | | | | |
| Continuing operations | | $ | 4.53 | | | $ | 2.04 | | | $ | 0.93 | | | $ | 7.82 | | | $ | 4.53 | | | $ | 2.04 | |
| Net earnings | | | 4.53 | | | | 2.06 | | | | 0.31 | | | | 7.82 | | | | 4.53 | | | | 2.06 | |
| Diluted: | | | | | | | | | | | | | | | | | | | | | | | | |
| Continuing operations | | $ | 4.46 | | | $ | 2.00 | | | $ | 0.91 | | | $ | 7.74 | | | $ | 4.46 | | | $ | 2.00 | |
| Net earnings | | | 4.46 | | | | 2.02 | | | | 0.30 | | | | 7.74 | | | | 4.46 | | | | 2.02 | |
Options outstanding with an exercise price greater than the average market priceFor each of the three years ended December 31, 2008, 2007 and 2006, we had no options to purchase common stock that were not included inexcluded from the computationcomputations of diluted earnings per share. The weighted average number of such options totaled 0, 0 and 0.2 million for 2007, 2006 and 2005, respectively.potentially dilutive securities.
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
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FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
were $40.0$34.0 million, $29.7$29.1 million, and $24.3$17.8 million in 2008, 2007 2006 and 2005,2006, 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.
Business Combinations — All business combinations referred to in these financial statements used the purchase method of accounting, under which we allocate the purchase price to the identifiable tangible and intangible assets and liabilities, recognizing goodwill when the purchase price exceeds fair value of such identifiable assets, net of liabilities assumed.
Accounting Developments
Pronouncements Implemented
In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments,” which amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS No. 155 improves the financial reporting of certain hybrid financial instruments and simplifies the accounting for these instruments. In particular, SFAS No. 155:
| | |
| • | permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation; |
|
| • | clarifies which interest-only and principal-only strips are not subject to the requirements of SFAS No. 133; |
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FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | |
| • | establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation; |
|
| • | clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives; and |
|
| • | amends SFAS No. 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. |
SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s fiscal year that begins after September 15, 2006. Our adoption of SFAS No. 155 effective January 1, 2007 had no impact on our consolidated financial condition or results of operations.
In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets — an amendment of Statement No. 140.” SFAS No. 156 clarifies when an obligation to service financial assets should be separately recognized as a servicing asset or a servicing liability, requires that a separately recognized servicing asset or servicing liability be initially measured at fair value and permits an entity with a separately recognized servicing asset or servicing liability to choose either the amortization method or fair value method for subsequent measurement. SFAS No. 156 is effective for all separately recognized servicing assets and liabilities acquired or issued after the beginning of an entity’s fiscal year that begins after September 15, 2006. Our adoption of SFAS No. 156 effective January 1, 2007 had no impact on our consolidated financial condition or results of operations.
In March 2006, the Emerging Issues Task Force (“EITF”) issued EITF IssueNo. 06-03, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation).” EITFNo. 06-03 requires that the presentation of taxes assessed by a governmental authority that are directly imposed on a revenue-producing transaction between a seller and a customer on either a gross (included in revenues and costs) or a net (excluded from revenues) basis is an accounting policy decision that should be disclosed pursuant to Accounting Principles Board Opinion (“APB”) No. 22, “Disclosure of Accounting Policies.” In addition, if any of such taxes are reported on a gross basis, a company should disclose, on an aggregated basis, the amounts of those taxes in interim and annual financial statements for each period for which an income statement is presented if those amounts are significant. EITF IssueNo. 06-03 is effective for interim and annual reporting periods beginning after December 31, 2006. As we have historically presented such taxes on a net basis within our results of operations, our adoption of EITF IssueNo. 06-03 effective January 1, 2007 did not have a material impact on our consolidated financial position or results of operations.
In July 2006, the FASB issued FIN No. 48, which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109. FIN No. 48 also prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, as well as guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The evaluation of a tax position in accordance with FIN No. 48 is a two-step process. The first step is a recognition process whereby the enterprise determines whether it is more-likely-than-not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The second step is a measurement process whereby a tax position that meets the more-likely-than-not recognition threshold is calculated to determine the amount of benefit to recognize in the financial statements. The provisions of FIN No. 48 are effective for fiscal years beginning after December 15, 2006. The impact on our consolidated financial condition and results of operations of adopting FIN No. 48 effective January 1, 2007 is presented in Note 16.
Pronouncements Not Yet Implemented
In September 2006, the FASBFinancial Accounting Standards Board (“FASB”) issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 establishes a single definition of fair value and a framework for measuring fair value under accounting principles generally
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FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
accepted in the United States (“GAAP”), and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements; however, it does not require any new fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. In February 2007,2008, the FASB issued FASB Staff Position (“FSP”)FAS 175-2,No. 157-2, “Effective Date of FASB Statement No. 157,” which delaysamends SFAS No. 157 by delaying the effective dateadoption of SFAS No. 157 for our nonfinancial assets and nonfinancial liabilities, to fiscal years beginning after November 15, 2008.except those items recognized or disclosed at fair value on an annual or more frequently recurring basis, until January 1, 2009. Our adoption of SFAS No. 157, as amended, effective January 1, 2008, did not have a material impact on our consolidated financial condition or results of operations. We do not expect the adoption of SFAS No. 157 as amended,in 2009 for nonfinancial assets and nonfinancial liabilities to have a material impact on our consolidated financial condition andor results of operations.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115.” SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. It provides entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. We do not expect theOur adoption of SFAS No. 159 to have a materialeffective January 1, 2008, had no impact on our consolidated financial condition andor results of operations as we do not currently invest in the types of instruments that are within the scope of this pronouncement.
Pronouncements Not Yet Implemented
In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations.” SFAS No. 141(R) establishes principles and requirements for how the acquirer in a business combination recognizes and measures identifiable assets acquired, liabilities assumed, non-controllingnoncontrolling interest in the acquiree and goodwill acquired, and expands disclosures about business combinations. SFAS No. 141(R) requires the acquirer to recognize changes in valuation allowances on acquired deferred tax assets to be recognized in operations. These changes in deferred tax benefits were previously recognized through a corresponding reduction to goodwill. With the exception of the provisions regarding acquired deferred taxes and tax contingencies, which are applicable to all business combinations, SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Early adoption is not permitted. We are still evaluatingdo not expect the impactadoption of SFAS No. 141(R) to have a material impact on our consolidated financial condition andor results of operations.
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FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In December 2007, the FASB issued SFAS No. 160, “Non-controlling“Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51.” SFAS No. 160 establishes accounting and reporting standards that require:
| | |
| | • | Thethe ownership interests in subsidiaries held by parties other than the parent to be clearly identified, labeled and presented in the consolidated balance sheet within equity, but separate from the parent’s equity.equity; |
| |
| | • | Thethe amount of consolidated net income attributable to the parent and to the non-controllingnoncontrolling interest to be clearly identified and presented on the face of the consolidated statement of income.income; |
| |
| | • | Changeschanges in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary to be accounted for consistently.consistently; |
| |
| | • | Whenwhen a subsidiary is deconsolidated, any retained non-controllingnoncontrolling equity investment in the former subsidiary to be initially measured at fair value.value; and |
| |
| | • | Entitiesentities to provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the non-controllingnoncontrolling owners. |
SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Early adoption is not permitted. SFAS No. 160 shall be applied prospectively as of the beginning of the fiscal year in which it is initially applied, except for the presentation and disclosure requirements. The presentation and disclosure requirements shall be applied retrospectively for all periods presented. We are still evaluatingdo not expect the impactadoption of SFAS No. 160 to have a material impact on our consolidated financial condition and results of operations.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133.” SFAS No. 161 enhances the current disclosure framework in SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” by requiring entities to provide detailed disclosures about how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations and how derivative instruments and related hedged items affect an entity’s financial condition, results of operations and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years beginning after November 15, 2008. We do not expect the adoption of SFAS No. 161 to have a material impact on our consolidated financial condition or results of operations.
In April 2008, the FASB issued FSPNo. SFAS 142-3, “Determination of the Useful Life of Intangible Assets.” FSPNo. SFAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142 “Goodwill and Other Intangible Assets.” FSPNo. SFAS 142-3 is intended to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141(R) and other GAAP. FSPNo. SFAS 142-3 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2008. We do not expect the adoption of FSPNo. SFAS 142-3 to have a material impact on our consolidated financial condition or results of operations.
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements that are presented in conformity with GAAP. SFAS No. 162 is effective 60 days following approval by the Securities and Exchange Commission (“SEC”) of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of ‘Present Fairly in Conformity With Generally Accepted Accounting Principles’.” We do not expect the adoption of SFAS No. 162 to have a material impact on our consolidated financial condition or results of operations.
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FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In May 2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee Insurance Contracts.” SFAS No. 163 requires that an insurance enterprise recognize a claim liability prior to an event of default and clarifies how SFAS No. 60, “Accounting and Reporting by Insurance Enterprises,” applies to financial guarantee insurance contracts. SFAS No. 163 is effective for financial statements issued for fiscal years, and all interim periods within those fiscal years, beginning after December 15, 2008, except for some disclosures about the insurance enterprise’s risk-management activities. We do not expect the adoption of SFAS No. 163 to have a material impact on our consolidated financial condition or results of operations.
In June 2008, the FASB issued FSPNo. EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” FSP EITFNo. 03-6-1 concluded that all outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends participate in undistributed earnings with common shareholders and, therefore, are considered participating securities for purposes of computing earnings per share. Entities that have participating securities that are not convertible into common stock are required to use the “two-class” method of computing earnings per share. The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. FSP EITFNo. 03-6-1 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2008, and all prior period earnings per share data presented should be retrospectively adjusted. We do not expect the adoption of FSPNo. EITF 03-6-1 to have a material impact on our consolidated financial condition or results of operations.
In December 2008, the FASB issued FSP No. SFAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets.” FSP No. SFAS 132(R)-1 amends SFAS No. 132(R), “Employers’ Disclosures about Pensions and Other Postretirement Benefits,” to provide guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. The disclosure requirements of FSP No. SFAS 132(R)-1 are effective for fiscal years ending after December 15, 2009. We do not expect the adoption of FSP No. SFAS 132(R)-1 to have a material impact on our consolidated financial condition or results of operations.
Although there are no other final pronouncements recently issued that we have not adopted and that we expect to impact reported financial information or disclosures, accounting promulgating bodies have a number of pending
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FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
projects that may directly impact us. We continue to evaluate the status of these projects, and as these projects become final, we will provide disclosures regarding the likelihood and magnitude of their impact, if any.
In 2007, we sold certain non-core assets for aggregate sales proceeds of $13.4 million. The largest sale occurred in December 2007, when we sold non-core assets related to the rail operations of our wholly owned Australian subsidiary, Thompsons, Kelly and Lewis, Pty. Ltd. (“TKL”), for $12.9 million, and recorded a pre-tax gain of $5.9 million after the allocation of $2.1 million of Flowserve Pump Division goodwill. The gain is included as a reduction of selling, general and administrative expense in our consolidated statement of income as the rail assets do not meet the definition of a discontinued operation. The TKL rail operations were a part of our larger Australian pump business. The rail assets were not material to our consolidated financial condition or results of operations. The pump assets at TKL were retained and remain a core part of our business.
General Services Group — During the first quarter ofOn December 31, 2005, we committed to a plan to divestsold certain non-core service operations, collectively called the General Services Group (“GSG”), and accordingly, evaluated impairment pursuant to a held-for-sale concept, as opposed to the previouslyheld-and-used concept. As part of our decision to sell, we allocated $12.3 million of goodwill to GSG based on its relative fair value to the division’s estimated fair value. We recognized impairment charges to goodwill and property, plant and equipment during 2005 aggregating $30.1 million relating to GSG as the number of potential buyers diminished to one purchaser during the bidding process and the business underperformed during the year due, in part, to the pending sale.
On December 31, 2005, we sold GSG to Furmanite, a unit of Dallas-based Xanser Corporation for a contingent sales price of $15.5 million in gross cash proceeds, including $2.0 million held in escrow pending final settlement and excluding approximately $12 million of net accounts receivable. Utilizing the $15.5 million contingent sales price, the sale resulted in a loss of $2.5 million ($3.8 million pre-tax), which we recognized in the fourth quarter of 2005. During the third quarter of 2006, we recognized $0.8 million ($1.1 million pre-tax) of reduction in the loss after an independent arbitrator issued a binding decision with respect to the valuation of inventory, which resolved one element of the contingent sales price. During the fourth quarter of 2006, we negotiated the final sales price of $17.1
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FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
$17.1 million, whereby we recognized an additional reduction in the loss on sale of $0.2 million ($0.5 million pre-tax), bringing the aggregate loss on sale recognized in 2006 and 2005 to $1.5 million ($2.2 million pre-tax). All remaining amounts due to us under the terms of the sale were collected in December 2006.
We used $10.9 million of the initial net cash proceeds to reduce our indebtedness in January 2006, and an additional $3.5 million in December 2006 using the final proceeds collected pursuant to this sale transaction. We allocated estimated interest expense related to this repayment to discontinued operations in 2005 based upon then prevailing interest rates. As a result of this sale, we have presented the resultsresolution of operationsthe contingent sales price of GSG as discontinued operations.
GSG generated the following results of operations for the year ended December 31, 2005:
| | | | | |
| | | 2005 | |
| | | (Amounts in millions) | |
| |
| Sales | | $ | 103.1 | |
| Cost of sales | | | 87.5 | |
| Selling, general and administrative expense | | | 57.5 | |
| Interest expense | | | 0.7 | |
| Other income (expense), net | | | 0.3 | |
| | | | | |
| Loss before income taxes | | | (42.9 | ) |
| Income tax benefit | | | 11.1 | |
| | | | | |
| Results for discontinued operations, net of tax | | $ | (31.8 | ) |
| | | | | |
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FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
We regularly evaluateFlowserve Pump Division acquired the remaining 50% interest in Niigata Worthington Company, Ltd. (“Niigata”), a Japanese manufacturer of pumps and other rotating equipment, effective March 1, 2008, for $2.4 million in cash. The incremental interest acquired was accounted for as a step acquisition opportunitiesand Niigata’s results of various sizes. operations have been consolidated since the date of acquisition. Prior to this transaction, our 50% interest in Niigata was recorded using the equity method of accounting. Upon consolidation as of the effective date of the acquisition of the remaining 50% interest in Niigata, our balance sheet reflected an increase in cash and debt of $5.7 million and $5.8 million, respectively. The purchase price was allocated to the assets acquired and liabilities assumed based on estimates of fair values at the date of the acquisition. The estimate of the fair value of the net assets acquired exceeded the cash paid and, accordingly, no goodwill was recognized. This acquisition was accounted for as a bargain purchase, resulting in a gain of $3.4 million recorded in the first quarter of 2008, which was reduced by $0.6 million to $2.8 million in the fourth quarter of 2008 when the purchase accounting was finalized. This gain is included in other income, net in the consolidated statement of income due to immateriality. No pro forma information has been provided due to immateriality.
During 2008, 2007 we completed one small acquisition for $2.3 million. Duringand 2006, we completed four small asset acquisitions for an aggregate purchase price of$0.6 million, $2.3 million and $8.0 million.million, respectively. Assets acquired primarily include inventory, fixed assets and intangible assets. These acquisitions are immaterial, individually and in aggregate, and thus, no pro forma financial information has been presented.
| |
| 4. | GOODWILL AND OTHER INTANGIBLE ASSETS |
The following table provides information about our changes in 2007 to intangible assets:assets during 2008:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2007 | | | December 31, 2008 | |
| | | Useful Life
| | Beginning
| | Change Due
| | | | Ending Gross
| | Accumulated
| | | Useful Life
| | Beginning
| | Change Due
| | | | Ending Gross
| | Accumulated
| |
| | | (Years) | | Gross Amount | | to Currency | | Other(3) | | Amount | | Amortization | | | (Years) | | Gross Amount | | to Currency | | Other | | Amount | | Amortization | |
| | | (Amounts in thousands, except years) | | | (Amounts in thousands, except years) | |
| |
| Finite-lived intangible assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Engineering drawings(1) | | | 10-20 | | | $ | 81,443 | | | $ | 789 | | | $ | — | | | $ | 82,232 | | | $ | (33,706 | ) | | | 10-20 | | | $ | 82,232 | | | $ | (864 | ) | | $ | — | | | $ | 81,368 | | | $ | (37,846 | ) |
| Distribution networks | | | 5-15 | | | | 13,868 | | | | — | | | | — | | | | 13,868 | | | | (6,866 | ) | | | 5-15 | | | | 13,868 | | | | — | | | | — | | | | 13,868 | | | | (7,813 | ) |
| Software | | | 10 | | | | 5,900 | | | | — | | | | — | | | | 5,900 | | | | (4,356 | ) | | | 10 | | | | 5,900 | | | | — | | | | — | | | | 5,900 | | | | (4,946 | ) |
| Patents | | | 10 | | | | 29,268 | | | | 776 | | | | — | | | | 30,044 | | | | (15,766 | ) | | | 10 | | | | 30,044 | | | | (1,462 | ) | | | — | | | | 28,582 | | | | (17,512 | ) |
| Other | | | 3-40 | | | | 15,686 | | | | 695 | | | | (3,800 | ) | | | 12,581 | | | | (11,401 | ) | | | 3-40 | | | | 12,581 | | | | (269 | ) | | | — | | | | 12,312 | | | | (12,098 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | $ | 146,165 | | | $ | 2,260 | | | $ | (3,800 | ) | | $ | 144,625 | | | $ | (72,095 | ) | | | | | | $ | 144,625 | | | $ | (2,595 | ) | | $ | — | | | $ | 142,030 | | | $ | (80,215 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
| Indefinite-lived intangible assets(2) | | | | | | $ | 62,768 | | | $ | 921 | | | $ | — | | | $ | 63,689 | | | $ | (1,485 | ) | | | | | | $ | 63,689 | | | $ | (2,100 | ) | | $ | — | | | $ | 61,589 | | | $ | (1,485 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
76
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table provides information about our changes in 2006 to intangible assets:assets during 2007:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2006 | | | December 31, 2007 | |
| | | Useful Life
| | Beginning
| | Change Due
| | | | Ending Gross
| | Accumulated
| | | Useful Life
| | Beginning
| | Change Due
| | | | Ending Gross
| | Accumulated
| |
| | | (Years) | | Gross Amount | | to Currency | | Acquisitions(4) | | Amount | | Amortization | | | (Years) | | Gross Amount | | to Currency | | Other(3) | | Amount | | Amortization | |
| | | (Amounts in thousands, except years) | | | (Amounts in thousands, except years) | |
| |
| Finite-lived intangible assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Engineering drawings(1) | | | 10-22.5 | | | $ | 80,434 | | | $ | 1,009 | | | $ | — | | | $ | 81,443 | | | $ | (28,308 | ) | | | 10-20 | | | $ | 81,443 | | | $ | 789 | | | $ | — | | | $ | 82,232 | | | $ | (33,706 | ) |
| Distribution networks | | | 15 | | | | 13,868 | | | | — | | | | — | | | | 13,868 | | | | (5,861 | ) | | | 5-15 | | | | 13,868 | | | | — | | | | — | | | | 13,868 | | | | (6,866 | ) |
| Software | | | 10 | | | | 5,900 | | | | — | | | | — | | | | 5,900 | | | | (3,786 | ) | | | 10 | | | | 5,900 | | | | — | | | | — | | | | 5,900 | | | | (4,356 | ) |
| Patents | | | 9.5-15.5 | | | | 28,032 | | | | 1,236 | | | | — | | | | 29,268 | | | | (12,898 | ) | | | 10 | | | | 29,268 | | | | 776 | | | | — | | | | 30,044 | | | | (15,766 | ) |
| Other | | | 3-40 | | | | 14,287 | | | | 683 | | | | 716 | | | | 15,686 | | | | (13,237 | ) | | | 3-40 | | | | 15,686 | | | | 695 | | | | (3,800 | ) | | | 12,581 | | | | (11,401 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | $ | 142,521 | | | $ | 2,928 | | | $ | 716 | | | $ | 146,165 | | | $ | (64,090 | ) | | | | | | $ | 146,165 | | | $ | 2,260 | | | $ | (3,800 | ) | | $ | 144,625 | | | $ | (72,095 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
| Indefinite-lived intangible assets(2) | | | | | | $ | 57,760 | | | $ | 1,608 | | | $ | 3,400 | | | $ | 62,768 | | | $ | (1,485 | ) | | | | | | $ | 62,768 | | | $ | 921 | | | $ | — | | | $ | 63,689 | | | $ | (1,485 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
| | |
| (1) | | Engineering drawings represent the estimated fair value associated with specific acquired product and component schematics. |
| |
| (2) | | Accumulated amortization for indefinite-lived intangible assets relates to amounts recorded prior to the implementation date of SFAS No. 142, “Goodwill and Other Intangible Assets”.142. |
| |
| (3) | | During 2007, our Flow Control Division wrote-off an expired and fully amortized non-compete agreement. |
|
(4) | | During 2006, our Flow Solutions Division acquired certain intangible assets. |
The following schedule outlines actual amortization recognized during 2008 and an estimate of future amortization based upon the finite-lived intangible assets owned at December 31, 2008:
| | | | | |
| | | Amortization
| |
| | | Expense | |
| | | (Amounts in thousands) | |
| |
| Actual for year ending December 31, 2008 | | $ | 8,120 | |
| Estimate for year ending December 31, 2009 | | | 9,943 | |
| Estimate for year ending December 31, 2010 | | | 9,692 | |
| Estimate for year ending December 31, 2011 | | | 9,139 | |
| Estimate for year ending December 31, 2012 | | | 5,730 | |
| Estimate for the year ending December 31, 2013 | | | 4,027 | |
| Thereafter | | | 23,284 | |
7377
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following schedule outlines actual amortization recognized during 2007 and an estimate of future amortization based upon the finite-lived intangible assets owned at December 31, 2007:
| | | | | |
| | | Amortization
| |
| | | Expense | |
| | | (Amounts in thousands) | |
| |
| Actual for year ending December 31, 2007 | | $ | 11,804 | |
| Estimate for year ending December 31, 2008 | | | 11,363 | |
| Estimate for year ending December 31, 2009 | | | 11,363 | |
| Estimate for year ending December 31, 2010 | | | 11,111 | |
| Estimate for year ending December 31, 2011 | | | 9,139 | |
| Estimate for year ending December 31, 2012 | | | 5,730 | |
| Thereafter | | | 27,224 | |
The changes in the carrying amount of goodwill for the years ended December 31, 20072008 and 20062007 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Flowserve
| | Flow
| | Flow
| | | | | Flowserve
| | Flow
| | Flow
| | | |
| | | Pump | | Control | | Solutions | | Total | | | Pump | | Control | | Solutions | | Total | |
| | | (Amounts in thousands) | | | (Amounts in thousands) | |
| |
| Balance — January 1, 2006 | | $ | 456,762 | | | $ | 346,795 | | | $ | 31,306 | | | $ | 834,863 | | |
| Acquisitions | | | 1,203 | | | | — | | | | 1,060 | | | | 2,263 | | |
| Currency translation | | | 2,708 | | | | 9,490 | | | | 1,799 | | | | 13,997 | | |
| | | | | | | | | | | |
| Balance — December 31, 2006 | | $ | 460,673 | | | $ | 356,285 | | | $ | 34,165 | | | $ | 851,123 | | |
| Balance — January 1, 2007 | | | $ | 460,673 | | | $ | 356,285 | | | $ | 34,165 | | | $ | 851,123 | |
| Acquisitions and purchase adjustments | | | 2,774 | | | | — | | | | — | | | | 2,774 | | | | 2,774 | | | | — | | | | — | | | | 2,774 | |
| Resolution of tax contingencies | | | — | | | | (5,207 | ) | | | — | | | | (5,207 | ) | | | — | | | | (5,207 | ) | | | — | | | | (5,207 | ) |
| Dispositions | | | (2,059 | ) | | | (332 | ) | | | — | | | | (2,391 | ) | | | (2,059 | ) | | | (332 | ) | | | — | | | | (2,391 | ) |
| Currency translation | | | 3,043 | | | | 1,843 | | | | 2,080 | | | | 6,966 | | | | 3,043 | | | | 1,843 | | | | 2,080 | | | | 6,966 | |
| | | | | | | | | | | | | | | | | | | |
| Balance — December 31, 2007 | | $ | 464,431 | | | $ | 352,589 | | | $ | 36,245 | | | $ | 853,265 | | | $ | 464,431 | | | $ | 352,589 | | | $ | 36,245 | | | $ | 853,265 | |
| Acquisitions | | | | — | | | | — | | | | 230 | | | | 230 | |
| Resolution of tax contingencies | | | | | | | | (1,100 | ) | | | | | | | (1,100 | ) |
| Currency translation(1) | | | | (2,256 | ) | | | (20,846 | ) | | | (898 | ) | | | (24,000 | ) |
| | | | | | | | | | | | | | | | | | | |
| Balance — December 31, 2008 | | | $ | 462,175 | | | $ | 330,643 | | | $ | 35,577 | | | $ | 828,395 | |
| | | | | | | | | | | |
| | |
| (1) | | The currency impact in Flow Control in 2008 is primarily related to goodwill recorded in the United Kingdom. |
| |
| 5. | FACTORING OF ACCOUNTS RECEIVABLE |
Through our European subsidiaries, we engageengaged in non-recourse factoring of certain accounts receivable. The various agreements havehad different terms, including options for renewal and mutual termination clauses. Our Credit Facilities, which are fully described in Note 11, limit12, limited factoring volume to $75.0 million at any given point in time as defined by our Credit Facilities. During the fourth quarter of 2007, we gave notice of our intent to terminate our major factoring agreements during 2008. All factoring agreements were terminated by the end of the third quarter of 2008. In the aggregate, the cash received from factored receivables outstanding at December 31, 2008 and 2007 totaled $0 and 2006 totaled $63.9 million and $69.1 million, respectively, which represent the factor’sfactors’ purchase of $68.4 million$0 and $76.7$68.4 million of our receivables, respectively.
In 2007,2008, under all of our factoring agreements worldwide, we recognized losses of approximately $4.5$0.9 million in factoring receivables, which compares with a total losslosses of $4.5 million and $2.8 million in 2007 and $2.3 million in 2006, and 2005, respectively.
Inventories, net consisted of the following:
| | | | | | | | | |
| | | December 31, | |
| | | 2008 | | | 2007 | |
| | | (Amounts in thousands) | |
| |
| Raw materials | | $ | 241,953 | | | $ | 221,265 | |
| Work in process | | | 635,490 | | | | 499,656 | |
| Finished goods | | | 264,746 | | | | 246,832 | |
| Less: Progress billings | | | (250,289 | ) | | | (223,980 | ) |
| Less: Excess and obsolete reserve | | | (57,288 | ) | | | (63,574 | ) |
| | | | | | | | | |
| Inventories, net | | $ | 834,612 | | | $ | 680,199 | |
| | | | | | | | | |
7478
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Inventories, net consisted of the following:
| | | | | | | | | |
| | | December 31, | |
| | | 2007 | | | 2006 | |
| | | (Amounts in thousands) | |
| |
| Raw materials | | $ | 221,265 | | | $ | 167,224 | |
| Work in process | | | 499,656 | | | | 354,808 | |
| Finished goods | | | 246,832 | | | | 225,157 | |
| Less: Progress billings | | | (223,980 | ) | | | (140,056 | ) |
| Less: Excess and obsolete reserve | | | (63,574 | ) | | | (59,760 | ) |
| | | | | | | | | |
| Inventories, net | | $ | 680,199 | | | $ | 547,373 | |
| | | | | | | | | |
During 2008, 2007 2006 and 20052006, we recognized expenses of $11.8 million, $8.9 million $6.3 million and $9.1$6.3 million, respectively, for obsolete and excess inventory. These expenses are included in cost of sales in our consolidated statements of income.
| |
| 7. | STOCK-BASED COMPENSATION PLANS |
Restricted Stock and Stock Option Plans — The Flowserve Corporation 2004 Stock Compensation Plan (the “2004 Plan”), which was established on April 21, 2004, authorized the issuance of up to 3,500,000 shares of common stock through grants of restricted stock, stock options, Restricted Shares, and other equity-based awards. Of the 3,500,000 shares of common stock that have been authorized under the 2004 Plan, 1,445,6531,182,016 remain available for issuance. In addition to the 2004 Plan, we maintain otheranother shareholder-approved plansplan that permitpermits the issuance of our common stock through grants of various equity-based awards. As of December 31, 2007, 138,6902008, 41,374 shares of common stock remained available for stock option grants under thesethis other plans.plan.
We recorded stock-based compensation as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2008 | | | 2007 | | | 2006 | |
| | | Stock
| | | Restricted
| | | | | | Stock
| | | Restricted
| | | | | | Stock
| | | Restricted
| | | | |
| | | Options | | | Shares | | | Total | | | Options | | | Shares | | | Total | | | Options(1) | | | Shares | | | Total | |
| | | (Amounts in millions) | |
| |
| Stock-based compensation expense | | $ | 1.4 | | | $ | 31.3 | | | $ | 32.7 | | | $ | 3.5 | | | $ | 21.8 | | | $ | 25.3 | | | $ | 12.3 | | | $ | 12.8 | | | $ | 25.1 | |
| Related income tax benefit | | | (0.3 | ) | | | (9.6 | ) | | | (9.9 | ) | | | (1.0 | ) | | | (6.8 | ) | | | (7.8 | ) | | | (3.0 | ) | | | (3.9 | ) | | | (6.9 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net stock-based compensation expense | | $ | 1.1 | | | $ | 21.7 | | | $ | 22.8 | | | $ | 2.5 | | | $ | 15.0 | | | $ | 17.5 | | | $ | 9.3 | | | $ | 8.9 | | | $ | 18.2 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
| (1) | | Includes the $3.8 million ($5.6 million pre-tax) modification charge recorded in August 2006 as discussed below in “Modifications” since the charge we would have recognized in accordance with FIN No. 44, “Accounting for Certain Transactions involving Stock Compensation — an interpretation of APB Opinion No. 25,” would have approximated the charge recognized in accordance with SFAS No. 123(R), “Share-Based Payment.” |
Stock Options — Options granted to officers, other employees and directors allow for the purchase of common shares at or above the market value of our stock on the date the options are granted, although no options have been granted above market value. Generally, options, whether granted under the 2004 Plan or other previously approved plans, become exercisable over a staggered period ranging from one to five years (most typically from one to three years). Options generally expire ten 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; however, as described in greater detail under “modifications”“Modifications” below, the expiration provisions relating to certain outstanding option awards were modified during 2006.
We adopted SFAS No. 123(R) on January 1, 2006. Prior to January 1, 2006, we accounted for stock-based compensation using the intrinsic value method as set forth in APB No. 25, “Accounting for Stock Issued to Employees,” and related interpretations as permitted by SFAS No. 123. Accordingly, we recognized compensation expense for restricted stock and other equity awards over the applicable vesting period; however, we did not recognize compensation expense for stock options for the year ended December 31, 2005, because the options were granted at market value on the date of grant.
Subsequent to the adoption of SFAS No. 123(R) on January 1, 2006, under the modified prospective method, we recorded stock-based compensation as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2007 | | | 2006 | |
| | | Stock
| | | Restricted
| | | | | | Stock
| | | Restricted
| | | | |
| | | Options | | | Stock | | | Total | | | Options(1) | | | Stock | | | Total | |
| | | (Amounts in millions) | |
| |
| Stock-based compensation expense | | $ | 3.5 | | | $ | 21.8 | | | $ | 25.3 | | | $ | 12.3 | | | $ | 12.8 | | | $ | 25.1 | |
| Related income tax benefit | | | (1.0 | ) | | | (6.8 | ) | | | (7.8 | ) | | | (3.0 | ) | | | (3.9 | ) | | | (6.9 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Net stock-based compensation expense | | $ | 2.5 | | | $ | 15.0 | | | $ | 17.5 | | | $ | 9.3 | | | $ | 8.9 | | | $ | 18.2 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
7579
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | |
(1) | | Includes the $3.8 million ($5.6 million pre-tax) modification charge recorded in August 2006 as discussed below in “Modifications” since the charge we would have recognized in accordance with FIN No. 44, “Accounting for Certain Transactions involving Stock Compensation — an interpretation of APB Opinion No. 25,” would have approximated the charge recognized in accordance with SFAS No. 123(R). |
The following table illustrates the effect of stock-based compensation on net earnings and earnings per share if we had applied the fair value recognition provisions of SFAS No. 123 to all stock-based employee compensation, calculated using the Black-Scholes option-pricing model, for the year ended December 31, 2005:
| | | | | |
| | | (Amounts in
| |
| | | thousands, except
| |
| | | per share amounts) | |
| |
| Net earnings, as reported | | $ | 17,074 | |
| Restricted stock compensation expense included in net earnings, net of tax | | | 8,692 | |
| Less: Stock-based employee compensation expense determined under fair value method for all awards, net of tax | | | (11,359 | ) |
| | | | | |
| Pro forma net earnings | | $ | 14,407 | |
| | | | | |
| Net earnings per share — basic: | | | | |
| As reported | | $ | 0.31 | |
| Pro forma | | | 0.26 | |
| Net earnings per share — diluted: | | | | |
| As reported | | $ | 0.30 | |
| Pro forma | | | 0.25 | |
Stock Options —during 2006. Information related to stock options issued to officers, other employees and directors under all plans is presented in the following table:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2007 | | 2006 | | 2005 | | | 2008 | | 2007 | | 2006 | |
| | | | | Weighted
| | | | Weighted
| | | | Weighted
| | | | | Weighted
| | | | Weighted
| | | | Weighted
| |
| | | | | Average
| | | | Average
| | | | Average
| | | | | Average
| | | | Average
| | | | Average
| |
| | | | | Exercise
| | | | Exercise
| | | | Exercise
| | | | | Exercise
| | | | Exercise
| | | | Exercise
| |
| | | Shares | | Price | | Shares | | Price | | Shares | | Price | | | Shares | | Price | | Shares | | Price | | Shares | | Price | |
| |
| Number of shares under option: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Outstanding — beginning of year | | | 1,462,032 | | | $ | 30.27 | | | | 2,966,326 | | | $ | 23.00 | | | | 2,820,160 | | | $ | 21.93 | | | | 677,193 | | | $ | 36.19 | | | | 1,462,032 | | | $ | 30.27 | | | | 2,966,326 | | | $ | 23.00 | |
| Granted | | | — | | | | — | | | | 319,850 | | | | 49.81 | | | | 456,048 | | | | 29.57 | | | | — | | | | — | | | | — | | | | — | | | | 319,850 | | | | 49.81 | |
| Exercised | | | (745,379 | ) | | | 24.64 | | | | (1,872,742 | ) | | | 21.74 | | | | (49,717 | ) | | | 19.96 | | | | (368,460 | ) | | | 33.23 | | | | (745,379 | ) | | | 24.64 | | | | (1,872,742 | ) | | | 21.74 | |
| Cancelled | | | (39,460 | ) | | | 35.06 | | | | (40,806 | ) | | | 33.97 | | | | (260,165 | ) | | | 23.46 | | | | (5,633 | ) | | | 47.47 | | | | (39,460 | ) | | | 35.06 | | | | (40,806 | ) | | | 33.97 | |
| Modified(1) | | | — | | | | — | | | | 89,404 | | | | 24.55 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 89,404 | | | | 24.55 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Outstanding — end of year | | | 677,193 | | | $ | 36.19 | | | | 1,462,032 | | | $ | 30.27 | | | | 2,966,326 | | | $ | 23.00 | | | | 303,100 | | | $ | 39.58 | | | | 677,193 | | | $ | 36.19 | | | | 1,462,032 | | | $ | 30.27 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Exercisable — end of year | | | 344,817 | | | $ | 30.92 | | | | 779,225 | | | $ | 23.87 | | | | 2,323,190 | | | $ | 21.83 | | | | 194,383 | | | $ | 33.59 | | | | 344,817 | | | $ | 30.92 | | | | 779,225 | | | $ | 23.87 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
| (1) | | Options originally expiring in 2005 that had their expiration dates extended contingent upon shareholder approval, which was obtained on August 24, 2006, as discussed below in “Modifications.” |
Additional information relating to the ranges of options outstanding at December 31, 2008, is as follows:
| | | | | | | | | | | | | | | | | | | | | |
| | | Weighted
| | | | | | | | | | | | | |
| | | Average
| | | Options Outstanding | | | Options Exercisable | |
| | | Remaining
| | | | | | Weighted Average
| | | | | | Weighted Average
| |
Range of Exercise
| | Contractual
| | | Number
| | | Exercise Price per
| | | Number
| | | Exercise Price per
| |
Prices per Share | | Life | | | Outstanding | | | Share | | | Outstanding | | | Share | |
| |
| $12.12 — 18.18 | | | 1.92 | | | | 12,700 | | | $ | 15.98 | | | | 12,700 | | | $ | 15.98 | |
| $18.19 — 24.24 | | | 4.53 | | | | 23,375 | | | | 19.47 | | | | 23,375 | | | | 19.47 | |
| $24.25 — 30.30 | | | 4.42 | | | | 47,092 | | | | 25.70 | | | | 47,092 | | | | 25.70 | |
| $30.31 — 36.36 | | | 6.43 | | | | 45,815 | | | | 32.50 | | | | 45,815 | | | | 32.50 | |
| $36.37 — 42.42 | | | 6.95 | | | | 10,167 | | | | 39.39 | | | | 10,167 | | | | 39.39 | |
| $42.43 — 48.48 | | | 7.12 | | | | 106,618 | | | | 48.17 | | | | 40,900 | | | | 48.17 | |
| $48.49 — 54.54 | | | 7.81 | | | | 44,500 | | | | 52.72 | | | | 9,334 | | | | 53.76 | |
| $54.55 — 60.60 | | | 7.35 | | | | 12,833 | | | | 59.12 | | | | 5,000 | | | | 60.02 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | 303,100 | | | $ | 39.58 | | | | 194,383 | | | $ | 33.59 | |
| | | | | | | | | | | | | | | | | | | | | |
No options were granted during 2008 and 2007. The weighted average fair value per share of options granted was $24.84 and $14.62 for the yearsyear ended December 31, 2006 and 2005, respectively. For purposes of pro forma disclosure, the estimated2006. The fair value of the options is amortized to expense over the options’ vesting periods. The “fair value” for these options ateach option awarded during 2006 was estimated on the date of grant was estimated using the Black-Scholes option pricing model.model using the following assumptions: the risk-free interest rate of 4.7% for periods within the contractual life of the option was based on the U.S. Treasury yield curve in effect at the time of grant; our dividend yield was zero because we did not declare dividends in 2006; stock volatility of 41.4% was determined based on historical price fluctuations of our stock; the average expected life of the stock options granted of 5.8 years was based on a10-year history of the timing of stock option exercises; and the forfeiture rate of 10.3% was based on unvested options forfeited compared with original total options granted over a rolling10-year period, excluding significant forfeiture events that were not expected to recur.
As of December 31, 2008, we have $0.3 million of unrecognized compensation cost related to outstanding unvested stock option awards, which is expected to be recognized over a weighted-average period of approximately 0.4 years.
7680
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Additional information relating to the ranges of options outstanding at December 31, 2007, is as follows:
| | | | | | | | | | | | | | | | | | | | | |
| | | Weighted
| | | | | | | | | | | | | |
| | | Average
| | | Options Outstanding | | | Options Exercisable | |
| | | Remaining
| | | | | | Weighted Average
| | | | | | Weighted Average
| |
Range of Exercise
| | Contractual
| | | Number
| | | Exercise Price per
| | | Number
| | | Exercise Price per
| |
Prices per Share | | Life | | | Outstanding | | | Share | | | Outstanding | | | Share | |
| |
| $12.12 — 18.18 | | | 2.77 | | | | 28,600 | | | $ | 16.64 | | | | 28,600 | | | $ | 16.64 | |
| $18.19 — 24.24 | | | 5.54 | | | | 66,065 | | | | 20.60 | | | | 66,065 | | | | 20.60 | |
| $24.25 — 30.30 | | | 6.15 | | | | 135,912 | | | | 25.91 | | | | 78,845 | | | | 25.97 | |
| $30.31 — 36.36 | | | 7.52 | | | | 169,502 | | | | 32.17 | | | | 94,918 | | | | 32.40 | |
| $36.37 — 42.42 | | | 7.96 | | | | 14,300 | | | | 39.39 | | | | 9,133 | | | | 39.39 | |
| $42.43 — 48.48 | | | 8.13 | | | | 188,481 | | | | 48.17 | | | | 54,254 | | | | 48.17 | |
| $48.49 — 54.54 | | | 8.78 | | | | 51,833 | | | | 52.87 | | | | 6,168 | | | | 53.94 | |
| $54.55 — 60.60 | | | 8.34 | | | | 22,500 | | | | 58.45 | | | | 6,834 | | | | 58.24 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | 677,193 | | | $ | 36.19 | | | | 344,817 | | | $ | 30.92 | |
| | | | | | | | | | | | | | | | | | | | | |
No options were granted during 2007. The fair value of each option awarded during 2006 and 2005 was estimated on the date of grant using the Black-Scholes option pricing model using the assumptions noted in the following table. The risk-free rate for periods within the contractual life of the option was based on the U.S. Treasury yield curve in effect at the time of grant. Our dividend yield was zero because we did not declare dividends in 2006 or 2005. Stock volatility was determined based on historical price fluctuations of our stock. The expected life of the stock options granted was based on a10-year history of the timing of stock option exercises. The forfeiture rate was based on unvested options forfeited compared with original total options granted over a rolling10-year period, excluding significant forfeiture events that are not expected to recur.
| | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2006 | | | 2005 | |
| |
| Risk-free interest rate | | | 4.7 | % | | | 4.6 | % |
| Dividend yield | | | — | | | | — | |
| Stock volatility | | | 41.4 | % | | | 43.2 | % |
| Average expected life (years) | | | 5.8 | | | | 6.4 | |
| Forfeiture rate | | | 10.3 | % | | | 9.7 | % |
As of December 31, 2007, we have $1.8 million of unrecognized compensation cost related to outstanding unvested stock option awards, which is expected to be recognized over a weighted-average period of approximately 0.9 years.
The weighted average remaining contractual life of options outstanding at December 31, 2008 and 2007 and 2006 is 7.26.3 years and 6.87.2 years, respectively. The total intrinsic value of stock options exercised during the years ended December 31, 2008, 2007 and 2006 and 2005 werewas $27.4 million, $32.1 million $54.7 million and $0.3$54.7 million, respectively. The total fair value of stock options vested during the years ended December 31, 2008, 2007 and 2006 and 2005 was $4.1 million, $5.5 million $3.4 million and $2.3$3.4 million, respectively.
Incremental stock-based compensation expense related solely to stock options recognized for the year ended December 31, 2006 as a result of the modified prospective adoption of SFAS No. 123(R) was $5.5 million ($6.9 million pre-tax), or $0.10 per share. This excludes the $5.6 million modification charge recorded in August 2006 as discussed below in “Modifications” since the charge we would have recognized in accordance with FIN No. 44 would have approximated the charge recognized in accordance with SFAS No. 123(R).
Restricted StockShares — In addition to the 2004 Plan, we also have restricted stock plans that authorize us to grant up to 2,384 additional shares of common stock or units with rights commensurate with restricted stock to employees
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
and non-employee directors. In general, the restrictions on the shares and unitsRestricted Shares do not expire for a minimum of one year and a maximum of tenfive years and are subject to forfeiture during the restriction period. Most typically, restricted shareRestricted Share grants have staggered vesting periods over one to three years from grant date. The intrinsic value of the shares and units,Restricted Shares, which is typically the product of share price at the date of grant and the number of shares and unitsRestricted Shares granted, is amortized on a straight-line basis to compensation expense over the periods in which the restrictions lapse. The forfeiture rate is based on unvested restricted shares and unitsRestricted Shares forfeited compared with original total restricted shares and unitsRestricted Shares granted over a5-year4-year period, excluding significant forfeiture events that are not expected to recur.
Awards of restricted stock are valued at the closing market price of our common stock on the date of grant. The unearnedUnearned compensation is amortized to compensation expense over the vesting period of the restricted stock. Prior to the adoption of SFAS No. 123(R), the unrecognized portion of unearned compensation associated with unvested restricted stock was recognized as a reclassification within equity, resulting in no net impact on shareholders’ equity. Effective January 1, 2006, the amounts have been reversed, with no net impact on shareholders’ equity.Restricted Shares. As of December 31, 20072008 and 2006,2007, we had $25.9$34.1 million and $15.0$25.9 million, respectively, of unearned compensation cost related to unvested restricted stock,Restricted Shares, which is expected to be recognized over a weighted-average period of approximately 1.71.3 years. These amounts will be recognized into net earnings in prospective periods as the awards vest. The total market value of restricted shares and unitsRestricted Shares vested during the years ended December 31, 2008, 2007 and 2006 and 2005 was $15.3 million, $11.2 million $3.7 million and $2.2$3.7 million, respectively.
The following tables summarize information regarding the restricted stock plans:Restricted Shares:
| | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2007 | | | Year Ended December 31, 2008 | |
| | | | | Weighted Average
| | | | | Weighted
| |
| | | | | Grant-Date Fair
| | | | | Average Grant-
| |
| | | Shares | | Value | | | Shares | | Date Fair Value | |
| |
| Number of unvested shares: | | | | | | | | | |
| Number of unvested Restricted Shares: | | | | | | | | | |
| Outstanding — beginning of year | | | 800,523 | | | $ | 37.91 | | | | 1,092,178 | | | $ | 47.87 | |
| Granted | | | 651,511 | | | | 53.40 | | | | 426,573 | | | | 101.77 | |
| Vested | | | (320,559 | ) | | | 35.00 | | | | (384,550 | ) | | | 39.67 | |
| Cancelled | | | (39,297 | ) | | | 41.45 | | | | (53,964 | ) | | | 67.31 | |
| | | | | | | |
| Unvested restricted stock | | | 1,092,178 | | | $ | 47.87 | | |
| Unvested Restricted Shares | | | | 1,080,237 | | | $ | 71.11 | |
| | | | | | | |
Unvested restricted stockRestricted Shares outstanding as of December 31, 2007,2008, includes 360,000 shares285,000 units with performance-based vesting provisions that range from 0 to 360,000 shares based on pre-defined performance targets.provisions. Performance-based restricted stock is earnedunits vest upon the achievement of performance targets, and isare issuable in common shares. Our performance targets are based on our average annual return on net assets over a rolling three-year period as compared with the same measure for a defined peer group for the same period. Compensation expense is recognized over a36-month cliff vesting period 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 570,000 shares based on pre-defined performance targets. As of December 31, 2008, we estimate vesting of 570,000 shares based on expected achievement of performance targets.
Modifications — During 2005, we made a number of modifications to our stock plans, including the acceleration of vesting of certain restricted stock grants and outstanding options, as well as the extension of the exercise period associated with certain outstanding options. These modifications resulted from severance agreements with former executives and from our decision to temporarily suspend option exercises. As a result of the modifications primarily associated with the severance agreements with former executives, we recorded additional stock-based compensation expense in 2005 of $7.2 million based upon the intrinsic values of the awards on the dates the modifications were made.
On June 1, 2005, we took action to extend to December 31, 2006, the regular term of certain options granted to employees, including executive officers, qualified retirees and directors, which were scheduled to
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FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
expire in 2005. On November 4, 2005, we took subsequent action to further extend the exercise date of these options, and options expiring in 2006, to January 1, 2009. We thereafter concluded, however, that recent regulatory guidance issued
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FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
under Section 409A of the Internal Revenue Code might cause the recipients of these extended options to become subject to unintended adverse tax consequences under Section 409A. Accordingly, effective December 14, 2005, the Organization and Compensation Committee of the Board of Directors partially rescinded, in accordance with the regulations, the extensions of the regular term of these options, to provide as follows:
(i) the regular term of options otherwise expiring in 2005 expired on October 29, 2006, and
(ii) the regular term of options otherwise expiring in 2006 expired on the later of:
(1) 75 days after the regular term of the option as originally granted expires, or
(2) December 31, 2006.
These extensions were subject to shareholder approval of applicable plan amendments, which was obtained at our annual shareholders’ meeting held on August 24, 2006. The approval of such plan amendments is considered a stock modification for financial reporting purposes subject to the recognition of a non-cash compensation charge in accordance with SFAS No. 123(R), and we recorded a charge of $5.6 million in 2006.
The earlier extension actions also extended the option exercise period available following separation from employment for reasons of death, disability and termination not for cause or certain voluntary separations. These separate extensions were partially rescinded at the December 14, 2005 meeting of the Organization and Compensation Committee of the Board of Directors, and as so revised are currently effective and not subject to shareholder approval. The exercise period available following such employment separations has been extended to the later of (i) 30 days after the options first became exercisable when our SEC filings first became current and an effective SECForm S-8 Registration Statement was filed with the SEC (both of which occurred September 29, 2006), or (ii) the period available for exercise following separation from employment under the terms of the option as originally granted. This extension is considered for financial reporting purposes as a stock modification subject to the recognition of a non-cash compensation charge in accordance with APB No. 25, of $1.0 million in 2005. The extension of the exercise period following separation from employment does not apply to option exercise periods governed by a separate separation contract or agreement.
| |
| 8. | DERIVATIVES AND HEDGING ACTIVITIES |
We enter into forward exchange contracts to hedge our risks associated with transactions denominated in currencies other than the local currency of the operation engaging in the transaction. Our risk management and derivatives policy specifies the conditions under which we may enter into derivative contracts. At December 31, 20072008 and 2006,2007, we had $464.9$555.7 million and $433.7$464.9 million, respectively, of notional amount in outstanding forward contracts with third parties. At December 31, 2007,2008, the length of forward exchange contracts currently in place ranged from 2 days to 2024 months.
The fair market value adjustments on forward contracts are recognized directly in our current period earnings. The fair value of these outstanding forward contracts at December 31, 2008 and 2007 was a net liability of $3.2 million and 2006 was a net asset of $6.6 million, and $3.4 million, respectively. Realized and unrealized net gains (losses) from the changes in the fair value of these forward contracts of $14.9 million, $5.7 million $5.8 million and $(5.2)$5.8 million, for the years ended December 31, 2008, 2007 2006 and 2005,2006, respectively, are included in other income (expense), net in the consolidated statements of income.
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, 20072008 and 2006,2007, we had $395.0$385.0 million and $435.0$395.0 million, respectively, of notional amount in outstanding interest rate swaps with third parties. At December 31, 2007,2008, the maximum remaining length of any interest rate contract in place was approximately 3330 months. The fair value of the interest rate swap agreements was a net liability of $4.1$10.6 million and a net assetliability of $1.9$4.1 million at December 31, 20072008 and 2006,2007, respectively. Unrealized (losses) gainslosses from the changes in fair value of our interest rate swap agreements, net of reclassifications, of $(3.9)$4.1 million and $0.7$3.9 million, net of tax, for the years ended December 31, 20072008 and 2006,2007, respectively, are included in other comprehensive income (loss).
79
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)(expense) income.
During 2004, we entered into a compound derivative contract to hedge exposure to both currency translation and interest rate risks associated with our EIBEuropean Investment Bank credit facility. The notional amount of the derivative was $85.0 million, and it served to convert floating rate interest rate risk to a fixed rate, as well as U.S. dollar currency risk to Euros. We repaid all amounts outstanding under this facility on December 15, 2006, and realized a foreign currency transaction gain of $8.5 million. We also settled the derivative for a loss of $9.9 million. The gain on the derivative, along with the foreign currency transaction gain on the underlying loan aggregate to $3.3 million and $0.2 million for the yearsyear ended December 31, 2006, and 2005, respectively, areis included in other income, (expense), net in the consolidated statements of income.
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FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 contracts and interest rate swap agreements and expect all counterparties to meet their obligations. We have not experienced credit losses from our counterparties.
Hedging relatedInterest Rate swap transactions recorded to other comprehensive (expense) income, (expense), net of deferred taxes, are summarized below:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Other Comprehensive Income (Expense) | | | Other Comprehensive (Expense) Income | |
| | | 2007 | | 2006 | | 2005 | | | 2008 | | 2007 | | 2006 | |
| | | (Amounts in thousands) | | | (Amounts in thousands) | |
| |
| Reclassification to earnings for settlements during the year: | | | | | | | | | | | | | | | | | | | | | | | | |
| Forward contracts | | $ | — | | | $ | 35 | | | $ | 125 | | |
| Forward exchange contracts | | | $ | — | | | $ | — | | | $ | 35 | |
| Interest rate swap agreements | | | 1,553 | | | | 529 | | | | 1,284 | | | | (2,863 | ) | | | 1,553 | | | | 529 | |
| Change in fair value: | | | | | | | | | | | | | | | | | | | | | | | | |
| Forward contracts | | | — | | | | — | | | | 28 | | |
| Forward exchange contracts | | | | — | | | | — | | | | — | |
| Interest rate swap agreements | | | (5,458 | ) | | | 133 | | | | 1,547 | | | | (1,243 | ) | | | (5,458 | ) | | | 133 | |
| | | | | | | | | | | | | | | |
| Year ended December 31 | | $ | (3,905 | ) | | $ | 697 | | | $ | 2,984 | | | $ | (4,106 | ) | | $ | (3,905 | ) | | $ | 697 | |
| | | | | | | | | | | | | | | |
We expect to recognize $1.5(losses) gains of $(5.3) million, $1.0$(1.8) million and $0.1 million, net of deferred taxes, into earnings in 2008, 2009, 2010 and 2010,2011, respectively, related to interest rate swap agreements based on their fair values at December 31, 2007.2008.
| |
| 9. | FAIR VALUE OF FINANCIAL INSTRUMENTS |
Our financial instruments, shown below, are presented at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models may be applied.
Beginning January 1, 2008, assets and liabilities recorded at fair value in our consolidated balance sheet are categorized based upon the level of judgment associated with the inputs used to measure their fair values. Hierarchical levels, as defined by SFAS No. 157 and directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows:
Level I — Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.
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.
An asset or a liability’s categorization within the fair value hierarchy is based on the lowest level of significant input to its valuation.
83
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The fair values of our financial instruments at December 31, 2008 were:
| | | | | | | | | | | | | | | | | |
| | | Total | | | Level I | | | Level II | | | Level III | |
| | | (Amounts in thousands) | |
| |
| Derivative assets | | $ | 12,436 | | | $ | — | | | $ | 12,436 | | | $ | — | |
| Deferred compensation assets and other investments | | | 14,594 | | | | 6,760 | | | | — | | | | 7,834 | |
| | | | | | | | | | | | | | | | | |
| Total assets | | $ | 27,030 | | | $ | 6,760 | | | $ | 12,436 | | | $ | 7,834 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | Total | | | Level I | | | Level II | | | Level III | |
| | | (Amounts in thousands) | |
| |
| Derivative liabilities | | $ | 26,284 | | | $ | — | | | $ | 26,284 | | | $ | — | |
| Deferred compensation liabilities | | | 3,143 | | | | — | | | | — | | | | 3,143 | |
| | | | | | | | | | | | | | | | | |
| Total liabilities | | $ | 29,427 | | | $ | — | | | $ | 26,284 | | | $ | 3,143 | |
| | | | | | | | | | | | | | | | | |
The Level III assets and liabilities above relate to investments and certain deferred compensation arrangements. When quoted market prices are unavailable, varying valuation techniques are used that reflect our best estimates of the assumptions used by market participants. Common inputs in valuing these assets include securities trade prices, recently reported trades or broker quotes. The value of all Level III assets was $7.8 million and $9.9 million at December 31, 2008 and 2007, respectively. The value of all Level III liabilities was $3.1 million and $4.4 million at December 31, 2008 and 2007, respectively. Changes in these assets and liabilities and their related impact on our consolidated statements of income for the year ended December 31, 2008 were immaterial.
| |
| 10. | 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, | |
| | | 2007 | | 2006 | | | 2008 | | 2007 | |
| | | (Amounts in thousands) | | | (Amounts in thousands) | |
| |
| Trade receivables | | $ | 609,984 | | | $ | 504,862 | | | $ | 766,294 | | | $ | 609,984 | |
| Other receivables | | | 70,968 | | | | 60,088 | | | | 65,895 | | | | 70,968 | |
| Allowance for doubtful accounts | | | (14,219 | ) | | | (13,135 | ) | |
| Less: allowance for doubtful accounts | | | | (23,667 | ) | | | (14,219 | ) |
| | | | | | | | | | | |
| Accounts receivable, net | | $ | 666,733 | | | $ | 551,815 | | | $ | 808,522 | | | $ | 666,733 | |
| | | | | | | | | | | |
Property, Plant, and Equipment, net — Property, plant and equipment, net were:
| | | | | | | | | |
| | | December 31, | |
| | | 2008 | | | 2007 | |
| | | (Amounts in thousands) | |
| |
| Land | | $ | 70,906 | | | $ | 73,786 | |
| Buildings, improvements, furniture and fixtures | | | 512,186 | | | | 495,912 | |
| Machinery, equipment, capital leases and construction in progress | | | 559,134 | | | | 494,474 | |
| | | | | | | | | |
| Gross property, plant and equipment | | | 1,142,226 | | | | 1,064,172 | |
| Less: accumulated depreciation | | | (594,991 | ) | | | (575,280 | ) |
| | | | | | | | | |
| Property, plant and equipment, net | | $ | 547,235 | | | $ | 488,892 | |
| | | | | | | | | |
8084
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Property, Plant, and Equipment, net — Property, plant and equipment, net were:
| | | | | | | | | |
| | | December 31, | |
| | | 2007 | | | 2006 | |
| | | (Amounts in thousands) | |
| |
| Land | | $ | 73,786 | | | $ | 69,531 | |
| Buildings, improvements, furniture and fixtures | | | 495,912 | | | | 422,838 | |
| Machinery, equipment, capital leases and construction in progress | | | 494,474 | | | | 459,556 | |
| | | | | | | | | |
| Gross property, plant and equipment | | | 1,064,172 | | | | 951,925 | |
| Less accumulated depreciation | | | (575,280 | ) | | | (509,033 | ) |
| | | | | | | | | |
| Property, plant and equipment, net | | $ | 488,892 | | | $ | 442,892 | |
| | | | | | | | | |
Depreciation expense for continuing operations in the amount of $52.6 million, $49.5 million $46.7 million and $46.9$46.7 million for the years ended December 31, 2008, 2007 2006 and 2005,2006, respectively, is included in cost of sales in the consolidated statements of income, with the remaining depreciation expense included in selling, general and administrative expense.
Other Assets, net — Other assets, net were:
| | | | | | | | | | | | | | | | | |
| | | December 31, | | | December 31, | |
| | | 2007 | | 2006 | | | 2008 | | 2007 | |
| | | (Amounts in thousands) | | | (Amounts in thousands) | |
| |
| Investments in equity method affiliates | | $ | 64,126 | | | $ | 50,060 | | | $ | 56,185 | | | $ | 64,126 | |
| Deferred loan costs | | | 6,781 | | | | 7,562 | | |
| Deferred compensation funding | | | 18,200 | | | | 22,221 | | |
| Long-term receivables, net | | | | 37,609 | | | | 16,183 | |
| Deferred compensation | | | | 16,074 | | | | 18,200 | |
| Other | | | 43,836 | | | | 23,407 | | | | 51,291 | | | | 34,434 | |
| | | | | | | | | | | |
| Other assets, net | | $ | 132,943 | | | $ | 103,250 | | | $ | 161,159 | | | $ | 132,943 | |
| | | | | | | | | | | |
Other assets include long-term tax receivables, deferred loan costs and other items, none of which individually exceed 5% of total assets.
Accrued Liabilities — Accrued liabilities were:
| | | | | | | | | | | | | | | | | |
| | | December 31, | | | December 31, | |
| | | 2007 | | 2006 | | | 2008 | | 2007 | |
| | | (Amounts in thousands) | | | (Amounts in thousands) | |
| |
| Wages, compensation and other benefits | | $ | 216,859 | | | $ | 170,348 | | | $ | 268,481 | | | $ | 216,859 | |
| Insurance expense | | | 3,812 | | | | 3,582 | | |
| Interest expense | | | 773 | | | | 1,642 | | |
| Cash dividends payable | | | 9,234 | | | | 439 | | | | 14,965 | | | | 9,234 | |
| Commissions and royalties | | | 33,718 | | | | 25,538 | | | | 32,842 | | | | 33,718 | |
| Customer deposits | | | 189,230 | | | | 74,851 | | | | 337,553 | | | | 189,230 | |
| Progress billings in excess of accumulated costs | | | 62,896 | | | | 44,523 | | | | 90,815 | | | | 62,896 | |
| Warranty costs | | | 34,408 | | | | 28,578 | | |
| Warranty costs and late delivery penalties | | | | 59,754 | | | | 54,242 | |
| Sales and use tax expense | | | 11,464 | | | | 8,127 | | | | 10,833 | | | | 11,464 | |
| Legal and environmental matters | | | 14,216 | | | | 14,721 | | | | 8,166 | | | | 14,216 | |
| Income tax | | | 44,935 | | | | 4,516 | | | | 51,222 | | | | 44,935 | |
| Derivative liabilities | | | | 23,563 | | | | 6,408 | |
| Other | | | 101,481 | | | | 81,365 | | | | 68,905 | | | | 79,824 | |
| | | | | | | | | | | |
| Accrued liabilities | | $ | 723,026 | | | $ | 458,230 | | | $ | 967,099 | | | $ | 723,026 | |
| | | | | | | | | | | |
Other accrued liabilities include professional fees, derivative liabilities, lease obligations, insurance, interest, freight and other items, none of which individually exceed 5% of current liabilities.
8185
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Retirement Obligations and Other Liabilities — Retirement obligations and other liabilities were:
| | | | | | | | | | | | | | | | | |
| | | December 31, | | | December 31, | |
| | | 2007 | | 2006 | | | 2008 | | 2007 | |
| | | (Amounts in thousands) | | | (Amounts in thousands) | |
| |
| Retirement and postretirement benefits | | $ | 221,517 | | | $ | 253,212 | | |
| Pension and postretirement benefits | | | $ | 274,348 | | | $ | 221,517 | |
| Deferred taxes | | | 43,313 | | | | 36,608 | | | | 17,388 | | | | 43,313 | |
| Deferred compensation | | | 20,627 | | | | 13,920 | | | | 8,055 | | | | 20,627 | |
| Derivative contracts | | | 1,791 | | | | 632 | | |
| Insurance accruals | | | | 17,663 | | | | 7,853 | |
| Minority interest | | | 7,240 | | | | 4,096 | | | | 6,431 | | | | 7,240 | |
| Other | | | 131,981 | | | | 99,626 | | | | 178,429 | | | | 125,919 | |
| | | | | | | | | | | |
| Retirement obligations and other liabilities | | $ | 426,469 | | | $ | 408,094 | | | $ | 502,314 | | | $ | 426,469 | |
| | | | | | | | | | | |
Other non-current liabilities includesinclude reserves for uncertain tax positions, reserves for legal and environmental matters reserves for uncertain tax positions and other items, none of which individually exceed 5% of total liabilities. See Note 1617 for discussion of uncertain tax positions.
| |
10.11. | EQUITY METHOD INVESTMENTS |
Summarized below is combined balance sheet and income statement information, based on the most recent financial information, for investments in entities we account for using the equity method (unaudited):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | | Year Ended December 31, | |
| | | 2007 | | 2006 | | 2005 | | | 2008(1) | | 2007 | | 2006 | |
| | | (Amounts in thousands) | | | (Amounts in thousands) | |
| |
| Revenues | | $ | 382,974 | | | $ | 295,545 | | | $ | 260,279 | | | $ | 318,468 | | | $ | 382,974 | | | $ | 295,545 | |
| Gross profit | | | 96,935 | | | | 79,599 | | | | 68,303 | | | | 85,051 | | | | 96,935 | | | | 79,599 | |
| Income before provision for income taxes | | | 62,972 | | | | 48,337 | | | | 39,509 | | | | 59,869 | | | | 62,972 | | | | 48,337 | |
Provision for income taxes | | | (20,200 | ) | | | (14,033 | ) | | | (13,111 | ) | | | (14,615 | ) | | | (20,200 | ) | | | (14,033 | ) |
| | | | | | | | | | | | | | | |
| Net income | | $ | 42,772 | | | $ | 34,304 | | | $ | 26,398 | | | $ | 45,254 | | | $ | 42,772 | | | $ | 34,304 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | December 31, | | | December 31, | |
| | | 2007 | | 2006 | | | 2008(1) | | 2007 | |
| | | (Amounts in thousands) | | | (Amounts in thousands) | |
| |
| Current assets | | $ | 218,444 | | | $ | 188,797 | | | $ | 166,511 | | | $ | 218,444 | |
| Noncurrent assets | | | 60,301 | | | | 48,316 | | | | 43,444 | | | | 60,301 | |
| | | | | | | | | | | |
| Total assets | | $ | 278,745 | | | $ | 237,113 | | | $ | 209,955 | | | $ | 278,745 | |
| | | | | | | | | | | |
| Current liabilities | | $ | 99,768 | | | $ | 91,798 | | | $ | 77,482 | | | $ | 99,768 | |
| Noncurrent liabilities | | | 31,125 | | | | 24,292 | | | | 10,574 | | | | 31,125 | |
| Shareholders’ equity | | | 147,852 | | | | 121,023 | | | | 121,899 | | | | 147,852 | |
| | | | | | | | | | | |
| Total liabilities and shareholders’ equity | | $ | 278,745 | | | $ | 237,113 | | | $ | 209,955 | | | $ | 278,745 | |
| | | | | | | | | | | |
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.
8286
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, | | | Year Ended December 31, | |
| | | 2007 | | 2006 | | 2005 | | | 2008(1) | | 2007 | | 2006 | |
| | | (Amounts in thousands) | | | (Amounts in thousands) | |
| |
| Equity income based on stated ownership percentages | | $ | 18,974 | | | $ | 14,820 | | | $ | 11,505 | | | $ | 18,971 | | | $ | 18,974 | | | $ | 14,820 | |
| Adjustments due to amortization of basis differences, timing of GAAP adjustments and other adjustments | | | (279 | ) | | | — | | | | 1,028 | | |
| Adjustments due to currency translation, U.S. GAAP conformity, dividend distributions, taxes on dividends and other adjustments | | | | (2,008 | ) | | | (279 | ) | | | — | |
| | | | | | | | | | | | | | | |
| Equity in income from investees | | $ | 18,695 | | | $ | 14,820 | | | $ | 12,533 | | | $ | 16,963 | | | $ | 18,695 | | | $ | 14,820 | |
| | | | | | | | | | | | | | | |
| | |
| (1) | | As discussed in Note 3, effective March 1, 2008, we purchased the remaining 50% interest in Niigata, resulting in the full consolidation of Niigata as of that date. Prior to this transaction, our 50% interest was recorded using the equity method of accounting. As a result, Niigata’s income statement information includes only the first two months of 2008. |
|
| (2) | | 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. |
| |
11.12. | DEBT AND LEASE OBLIGATIONS |
Debt, including capital lease obligations, consisted of:
| | | | | | | | | | | | | | | | | |
| | | December 31, | | | December 31, | |
| | | 2007 | | 2006 | | | 2008 | | 2007 | |
| | | (Amounts in thousands) | | | (Amounts in thousands) | |
| |
| Term Loan, interest rate of 6.40% in 2007 and 6.88% in 2006 | | $ | 555,379 | | | $ | 558,220 | | |
| Capital lease obligations and other | | | 2,597 | | | | 6,349 | | |
| Term Loan, interest rate of 2.99% in 2008 and 6.40% in 2007 | | | $ | 549,697 | | | $ | 555,379 | |
| Capital lease obligations and other borrowings | | | | 23,651 | | | | 2,597 | |
| | | | | | | | | | | |
| Debt and capital lease obligations | | | 557,976 | | | | 564,569 | | | | 573,348 | | | | 557,976 | |
| Less amounts due within one year | | | 7,181 | | | | 8,050 | | | | 27,731 | | | | 7,181 | |
| | | | | | | | | | | |
| Total debt due after one year | | $ | 550,795 | | | $ | 556,519 | | | $ | 545,617 | | | $ | 550,795 | |
| | | | | | | | | | | |
Scheduled maturities of the Credit Facilities (as described below), as well as capital lease obligations and other borrowings, for the next five years and beyond are:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Capital Leases &
| | | | | | | Capital Leases &
| | | |
| | | Term Loans | | Other | | Total | | | Term Loans | | Other | | Total | |
| | | (Amounts in thousands) | | | (Amounts in thousands) | |
| |
| 2008 | | $ | 5,682 | | | $ | 1,499 | | | $ | 7,181 | | |
| 2009 | | | 5,682 | | | | 648 | | | | 6,330 | | | $ | 5,682 | | | $ | 22,049 | | | $ | 27,731 | |
| 2010 | | | 5,682 | | | | 450 | | | | 6,132 | | | | 5,682 | | | | 1,602 | | | | 7,284 | |
| 2011 | | | 137,779 | | | | — | | | | 137,779 | | | | 137,779 | | | | — | | | | 137,779 | |
| 2012 | | | 400,554 | | | | — | | | | 400,554 | | | | 400,554 | | | | — | | | | 400,554 | |
| Thereafter | | | — | | | | — | | | | — | | |
| | | | | | | | | | | | | | | |
| Total | | $ | 555,379 | | | $ | 2,597 | | | $ | 557,976 | | | $ | 549,697 | | | $ | 23,651 | | | $ | 573,348 | |
| | | | | | | | | | | | | | | |
Credit Facilities — On August 12, 2005, we entered into Credit FacilitiesOur credit facilities, as amended, are comprised of a $600.0 million term loan maturing on August 10, 2012 and a $400.0 million revolving line of credit, which can be utilized to provide up to $300.0 million in letters of credit, expiring on August 12, 2010.10, 2012. We hereinafter refer to these credit facilities collectively as our Credit“Credit Facilities. We used the proceeds of borrowings under our Credit Facilities to refinance our 12.25% Senior Subordinated Notes” At both December 31, 2008 and indebtedness outstanding under our previous credit facilities. Further, we replaced the letter of credit agreement that guaranteed our EIB credit facility (described below) with a letter of credit issued as part of the Credit Facilities.
On August 6, 2007, we amended our Credit Facilities to, among other things, reduce the applicable margin applied to borrowingshad no amounts outstanding under the revolving line of credit, as well as extend the maturity date of the revolving line of credit, by two years to August 12, 2012. The amendment also eliminates all mandatory debt repayment requirements and the restriction on capital expenditures. The amendment further replaces the dollar limitation on
8387
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
acquisitionsof credit. We had outstanding letters of credit of $104.2 million and certain restricted payments, with a limitation based on pro forma compliance with the required leverage ratio in both cases.$115.1 million at December 31, 2008 and 2007, respectively, which reduced our borrowing capacity to $295.8 million and $284.9 million, respectively.
Borrowings under our Credit Facilities bear interest at a rate equal to, at our option, either (1) the base rate (which is based on greater of the prime rate most recently announced by the administrative agent under our Credit Facilities or the Federal Funds rate plus 0.50%) or (2) London Interbank Offered Rate (“LIBOR”) plus an applicable margin determined by reference to the ratio of our total debt to consolidated Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”), which as of December 31, 20072008 was 1.00%0.875% and 1.50%1.5% for borrowings under our revolving line of credit and term loan, respectively. In connection with our Credit Facilities, we have entered into $385.0 million of notional amount of interest rate swaps at December 31, 2008 to hedge exposure to floating interest rates.
In addition, we pay lenders under the Credit Facilities a commitment fee equal to a percentage, determined by reference to the ratio of our total debt to consolidated EBITDA, of the unutilized portion of the revolving line of credit, and letter of credit fees with respect to each financial standby letter of credit outstanding under our Credit Facilities equal to a percentage based on the applicable margin in effect for LIBOR borrowings under the new revolving line of credit. The feefees for financial and performance standby letters of credit is 0.5% lower than the fee for financial standby letters of credit. At both December 31, 2007are 0.875% and 2006, we had no amounts outstanding under the revolving line of credit. We had outstanding letters of credit of $115.1 million and $83.9 million at December 31, 2007 and 2006, respectively, which reduced our borrowing capacity to $284.9 million and $316.1 million,0.4375%, respectively. In connection with our Credit Facilities, we have entered into $395.0 million of notional amount of interest rate swaps at December 31, 2007 to hedge exposure of floating interest rates.
We incurred $9.3 million in fees related to the Credit Facilities, of which $0.8 million were expensed in 2005. Based upon the final syndicate of financial institutions for the Credit Facilities, we expensed $10.5 million of these unamortized deferred loan costs in 2005. In addition to the total loan costs of $11.3 million that were expensed, we recorded a charge of $16.4 million for premiums paid to call the Senior Subordinated Notes, for a total loss on extinguishment of $27.7 million recorded in 2005. The remaining $8.5 million of fees related to the Credit Facilities were capitalized and combined with the remaining $1.3 million of previously unamortized deferred loan costs for a total of $9.8 million in deferred loan costs included in other assets, net. These costs are being amortized over the term of the Credit Facilities.
Our obligations under the Credit Facilities are unconditionally guaranteed, jointly and severally, by substantially all of our existing and subsequently acquired or organized domestic subsidiaries and 65% of the capital stock of certain foreign subsidiaries. In addition, prior to our obtaining and maintaining investment grade credit ratings, our and the guarantors’ obligations under the Credit Facilities are collateralized by substantially all of our and the guarantors’ assets.
We may prepay loans under our Credit Facilities in whole or in part, without premium or penalty.
Our Credit Facilities contain, among other things, covenants restricting 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 sale and leaseback transactions, enter into transactions with affiliates, make capital expenditures, or engage in any business activity other than our existing business. Our Credit Facilities also contain covenants requiring us to deliver to lenders our audited annual and unaudited quarterly financial statements and leverage and interest coverage financial covenants. Under the leverage covenant thecertificates of compliance. The maximum permitted leverage ratio stepped down in the fourth quarter of 2006. On August 7, 2007 our Credit Facilities were amended to, among other things, permit a maximum leverage ratio ofis 3.25 times debt to EBITDA with no further reductions. Under thetotal consolidated EBITDA. The minimum interest coverage covenant, the minimum requiredis 3.25 times consolidated EBITDA to total interest coverage ratio stepped up in the fourth quarter of 2006, with a furtherstep-up beginning in the fourth quarter of 2007.expense. Compliance with these financial covenants under our Credit Facilities is tested quarterly.
Our Credit Facilities include events of default usual for these types of credit facilities, including nonpayment of principal or interest, violation of covenants, incorrectness of representations and warranties, cross defaults and cross acceleration, bankruptcy, material judgments, Employee Retirement Income Security Act of 1974, as
84
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
amended (“ERISA”), events, actual or asserted invalidity of the guarantees or the security documents, and certain changes of control of our company. The occurrence of any event of default could result in the acceleration of our and the guarantors’ obligations under the Credit Facilities. We complied with the covenants through December 31, 2007.2008.
Repayment of obligations — We made scheduled repayments under our Credit Facilities of $5.7 million, $2.8 million, and $0 in 2008, 2007 and 2006, respectively. We made no mandatory repayments in 2008 or 2007. Mandatory repayments in 2006 consisted of $14.4 million, using the net cash proceeds from the sale of GSG, and $0.9 million, using excess cash flows as defined by the Credit Facilities. We made no optional prepayments in 2008 or 2007. In 2006, we made optional prepayments of $5.0 million under our Credit Facilities, and we terminated our European Investment Bank Credit Facility and repaid the outstanding principle balance of $85.0 million.
We may prepay loans under our Credit Facilities in whole or in part, without premium or penalty, at any time.
88
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
European Letter of Credit Facility — On September 14, 2007, we entered into an unsecured European Letter of Credit Facility (“European LOC Facility”), which is renewable annually, to issue letters of credit in an aggregate face amount not to exceed €150.0 million at any time, with antime. The initial commitment of €80.0 million.million was increased to €110.0 million, effective September 12, 2008. The aggregate commitment of the European LOC Facility may be increased up to €150.0 million as may be agreed among the parties, and may be decreased by us at our option without any premium, fee or penalty. The European LOC will beFacility is used for contingent obligations solely in respect of surety and performance bonds, bank guarantees and similar obligations. We had outstanding letters of credit drawn on the European LOC Facility of €104.0 million ($145.2 million) and €35.0 million ($51.1 million) as of December 31, 2007.2008 and 2007, respectively. We will pay certain fees for the letters of credit written against the European LOC Facility based upon the ratio of our total debt to consolidated EBITDA. As of December 31, 20072008, the annual fees equaled 0.5%0.875% plus a fronting fee of 0.1%.
EIB Credit Facility — In August 2004, we borrowed $85.0 million at a floating interest rate based on3-month U.S. LIBOR that reset quarterly. We repaid the outstanding principal balance and terminated this facility on December 15, 2006, using cash generated from operations. As a result of this repayment, we incurred expenses of $0.5 million related to the write-off of unamortized deferred financing costs. Concurrent with borrowing the $85.0 million, we entered into a derivative contract with a third party financial institution, swapped this principal amount to €70.6 million and fixed the LIBOR portion of the interest rate to a fixed interest rate of 4.19% through the scheduled repayment date. We did not apply hedge accounting to the derivative contract, and the unrealized gain (loss) on the derivative, and the foreign currency transaction gain on the underlying loan were included in other income (expense), net in the consolidated statements of income. As discussed more fully in Note 8, we settled this derivative concurrent with the repayment of the underlying loan.
Repayment of obligations — We made scheduled repayments of $2.8 million, $0 and $1.5 million in 2007, 2006 and 2005, respectively.
We made mandatory repayments of $0, $15.3 million and $0 in 2007, 2006 and 2005, respectively. Mandatory repayments in 2006 consisted of $14.4 million, using the net cash proceeds from the sale of GSG, and $0.9 million, using excess cash flows as defined by the Credit Facilities.
We made no optional prepayments in 2007. In 2006, we made optional prepayments of $5.0 million under our Credit Facilities, and we terminated our EIB Credit Facility and repaid the outstanding principle balance of $85.0 million. In 2005 we made optional prepayments of $20.0 million under our Credit Facilities and optional payments of $18.4 million under other financing arrangements.
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 $43.6 million, $39.3 million in 2007,and $29.3 million in 2008, 2007 and 2006, and $22.1 million in 2005.respectively.
The future minimum lease payments due under non-cancelable operating leases are:are (amounts in thousands):
| | | | | | | | | |
Year Ended December 31, | | (Amounts in thousands) | | | | |
| |
| 2008 | | $ | 34,564 | | |
| 2009 | | | 28,089 | | | $ | 45,300 | |
| 2010 | | | 21,907 | | | | 37,521 | |
| 2011 | | | 15,648 | | | | 28,848 | |
| 2012 | | | 12,136 | | | | 21,497 | |
| 2013 | | | | 17,477 | |
| Thereafter | | | 15,179 | | | | 33,847 | |
| | | | | | | |
| Total minimum lease payments | | $ | 127,523 | | | $ | 184,490 | |
| | | | | | | |
85
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
12.13. | RETIREMENTPENSION AND POSTRETIREMENT BENEFITS |
We sponsor several noncontributory defined benefit pension plans, covering substantially all U.S. employees and certainnon-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 proscribed by prevailing regulation. We also maintain unfunded defined benefit plans which, as permitted by local regulations, receive funding only when benefits become due.
For all periods presented, we used a measurement date of December 31 for all of our worldwide pension plans and for our 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 qualified plan isU.S. plans are designed to operate as a “cash balance” arrangement,arrangements, under which the total accumulated benefit obligation is equivalent to the total projected benefit obligation.obligation (“Benefit Obligation”).
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 which are otherwise limited by U.S. Department of Labor rules.
89
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Net defined benefit 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, | |
| | | 2007 | | 2006 | | 2005 | | | 2008 | | 2007 | | 2006 | |
| | | (Amounts in thousands) | | | (Amounts in thousands) | |
| |
| Service cost | | $ | 16,417 | | | $ | 14,864 | | | $ | 14,832 | | | $ | 16,685 | | | $ | 16,417 | | | $ | 14,864 | |
| Interest cost | | | 16,372 | | | | 15,538 | | | | 15,549 | | | | 17,743 | | | | 16,372 | | | | 15,538 | |
| Expected return on plan assets | | | (17,006 | ) | | | (15,751 | ) | | | (16,444 | ) | | | (20,150 | ) | | | (17,006 | ) | | | (15,751 | ) |
| Settlement and curtailment of benefits | | | — | | | | — | | | | (266 | ) | |
| Amortization of unrecognized prior service benefit | | | (1,356 | ) | | | (1,347 | ) | | | (1,459 | ) | | | (1,326 | ) | | | (1,356 | ) | | | (1,347 | ) |
| Amortization of unrecognized net loss | | | 6,115 | | | | 6,353 | | | | 4,974 | | | | 4,607 | | | | 6,115 | | | | 6,353 | |
| | | | | | | | | | | | | | | |
| U.S. pension expense | | $ | 20,542 | | | $ | 19,657 | | | $ | 17,186 | | |
| U.S. net pension expense | | | $ | 17,559 | | | $ | 20,542 | | | $ | 19,657 | |
| | | | | | | | | | | | | | | |
The settlement and curtailment expense in 2005 is associated with the sale of GSG, as discussed in Note 2, partially offset by the departure of former executives.
The estimated prior service benefit for the defined benefit pension plans that will be amortized from accumulated other comprehensive loss into U.S. pension expense in 20082009 is $1.3 million. The estimated net loss for the defined benefit pension plans that will be amortized from accumulated other comprehensive loss into U.S. pension expense in 20082009 is $4.3$6.5 million. We amortize estimated prior service benefits and estimated net losses over the remaining expected service period.
The following summarizes the net pension liability for U.S. plans:
| | | | | | | | | |
| | | December 31, | |
| | | 2008 | | | 2007 | |
| | | (Amounts in thousands) | |
| |
| Benefit Obligation | | $ | 304,341 | | | $ | 297,319 | |
| Plan assets, at fair value | | | 196,042 | | | | 251,215 | |
| | | | | | | | | |
| Funded status | | $ | (108,299 | ) | | $ | (46,104 | ) |
| | | | | | | | | |
The following summarizes amounts recognized in the balance sheet for U.S. plans:
| | | | | | | | | |
| | | December 31, | |
| | | 2008 | | | 2007 | |
| | | (Amounts in thousands) | |
| |
| Current liabilities | | $ | (368 | ) | | $ | (378 | ) |
| Noncurrent liabilities | | | (107,931 | ) | | | (45,726 | ) |
| | | | | | | | | |
| Funded status | | $ | (108,299 | ) | | $ | (46,104 | ) |
| | | | | | | | | |
8690
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following summarizes the net pension liability for U.S. plans:
| | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2007 | | | 2006 | |
| | | (Amounts in thousands) | |
| |
| Benefit obligation | | $ | 297,319 | | | $ | 295,549 | |
| Plan assets, at fair value | | | 251,215 | | | | 242,045 | |
| | | | | | | | | |
| Funded status | | $ | (46,104 | ) | | $ | (53,504 | ) |
| | | | | | | | | |
| Accumulated other comprehensive loss, net of tax: | | | | | | | | |
| Unrecognized net loss | | $ | (52,345 | ) | | $ | (60,522 | ) |
| Unrecognized prior service benefit | | | 3,972 | | | | 5,205 | |
| Deferred tax asset | | | (27,127 | ) | | | (31,996 | ) |
| Net amount recognized | | | 29,396 | | | | 33,809 | |
| | | | | | | | | |
| Funded status | | $ | (46,104 | ) | | $ | (53,504 | ) |
| | | | | | | | | |
The following summarizes amounts recognized in the balance sheet for U.S. plans:
| | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2007 | | | 2006 | |
| | | (Amounts in thousands) | |
| |
| Current liabilities | | $ | (378 | ) | | $ | (370 | ) |
| Noncurrent liabilities | | | (45,726 | ) | | | (53,134 | ) |
| | | | | | | | | |
| Funded status | | $ | (46,104 | ) | | $ | (53,504 | ) |
| | | | | | | | | |
The following table shows the change in accumulated other comprehensive loss attributable to the components of the net cost and the change in benefit obligationsBenefit Obligations for U.S. plans, net of tax:
| | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2008 | | | 2007 | | | 2006 | |
| | | (Amounts in thousands) | |
| |
| Balance — January 1 | | $ | (48,741 | ) | | $ | (55,682 | ) | | $ | (65,622 | ) |
| Increase (decrease) in minimum liability included in other comprehensive income prior to adoption of SFAS No. 158 | | | — | | | | — | | | | 10,290 | |
| Adoption of SFAS No. 158 | | | — | | | | — | | | | (350 | ) |
| Amortization of net loss | | | 2,866 | | | | 3,593 | | | | — | |
| Amortization of prior service benefit | | | (825 | ) | | | (797 | ) | | | — | |
| Net (loss) gain arising during the year | | | (60,945 | ) | | | 4,532 | | | | | |
| New prior service cost arising during the year | | | (459 | ) | | | (387 | ) | | | — | |
| | | | | | | | | | | | | |
| Balance — December 31 | | $ | (108,104 | ) | | $ | (48,741 | ) | | $ | (55,682 | ) |
| | | | | | | | | | | | | |
| | | | | | | | | |
| | | December 31, | |
| | | 2008 | | | 2007 | |
| | | (Amounts in thousands) | |
| |
| Unrecognized net loss | | $ | (110,720 | ) | | $ | (52,345 | ) |
| Unrecognized prior service benefit | | | 2,616 | | | | 3,972 | |
| | | | | | | | | |
| Accumulated other comprehensive loss, net of tax: | | $ | (108,104 | ) | | $ | (48,373 | ) |
| | | | | | | | | |
The following are assumptions related to the U.S. defined benefit pension plans:
| | | | | | | | | | | | | |
| | | 2007 | | | 2006 | | | 2005 | |
| | | (Amounts in thousands) | |
| |
| Balance — January 1 | | $ | (55,682 | ) | | $ | (65,622 | ) | | $ | (53,668 | ) |
| Increase (decrease) in minimum liability included in other comprehensive income prior to adoption of SFAS No. 158 | | | — | | | | 10,290 | | | | (11,954 | ) |
| Adoption of SFAS No. 158 | | | — | | | | (350 | ) | | | — | |
| Amortization of net loss | | | 3,593 | | | | — | | | | — | |
| Amortization of prior service benefit | | | (797 | ) | | | — | | | | — | |
| Net gain arising during the year | | | 4,532 | | | | | | | | | |
| New prior service benefit | | | (387 | ) | | | — | | | | — | |
| | | | | | | | | | | | | |
| Balance — December 31 | | $ | (48,741 | ) | | $ | (55,682 | ) | | $ | (65,622 | ) |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2008 | | 2007 | | 2006 |
| |
| Weighted average assumptions used to determine Benefit Obligations: | | | | | | | | | | | | |
| Discount rate | | | 6.75 | % | | | 6.25 | % | | | 5.75 | % |
| Rate of increase in compensation levels | | | 4.80 | | | | 4.50 | | | | 4.50 | |
| Weighted average assumptions used to determine net pension expense: | | | | | | | | | | | | |
| Long-term rate of return on assets | | | 8.00 | % | | | 7.75 | % | | | 7.50 | % |
| Discount rate | | | 6.25 | | | | 5.75 | | | | 5.50 | |
| Rate of increase in compensation levels | | | 4.50 | | | | 4.50 | | | | 4.50 | |
At December 31, 2008 as compared to December 31, 2007, we increased our discount rate from 6.25% to 6.75% based on an analysis of publicly-traded investment grade U.S. corporate bonds, which had a higher yield due to current market conditions. We increased our average assumed rate of compensation increase from 4.5% to 4.8%. We increased the expected rate of return on assets from 7.75% to 8.00%, primarily based on our target 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.
8791
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following are assumptions related to the U.S. defined benefit pension plans:
| | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2007 | | | 2006 | | | 2005 | |
| |
| Weighted average assumptions used to determine benefit obligations: | | | | | | | | | | | | |
| Discount rate | | | 6.25 | % | | | 5.75 | % | | | 5.50 | % |
| Rate of increase in compensation levels | | | 4.50 | | | | 4.50 | | | | 4.50 | |
| Weighted average assumptions used to determine net cost: | | | | | | | | | | | | |
| Long-term rate of return on assets | | | 7.75 | % | | | 7.50 | % | | | 8.25 | % |
| Discount rate | | | 5.75 | | | | 5.50 | | | | 5.75 | |
| Rate of increase in compensation levels | | | 4.50 | | | | 4.50 | | | | 4.50 | |
We increased the discount rate from 5.75% at December 31, 2006, to 6.25% at December 31, 2007, to reflect the current interest rate environment and the expected benefit payment streams. We regularly evaluate assumptions for asset returns and discount rates based on a variety of factors. Based on the results of pension plan asset returns during 2006 and on the anticipated future return, we increased the assumed rate of return of such assets from 7.50% for 2006 to 7.75% for 2007. The expected long-term rate of return on assets was determined by assessing the rates of return for each targeted asset class and return premiums generated by active portfolio management.
The following is a summary of the changes in the U.S. defined benefit plans’ pension obligations:
| | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | | December 31, | |
| | | 2007 | | 2006 | | | 2008 | | 2007 | |
| | | (Amounts in thousands) | | | (Amounts in thousands) | |
| |
| Beginning benefit obligations | | $ | 295,549 | | | $ | 294,291 | | |
| Beginning Benefit Obligations | | | $ | 297,319 | | | $ | 295,549 | |
| Service cost | | | 16,417 | | | | 14,864 | | | | 16,685 | | | | 16,417 | |
| Interest cost | | | 16,372 | | | | 15,538 | | | | 17,743 | | | | 16,372 | |
Plan amendments(1) | | | 660 | | | | 27 | | | | 737 | | | | 660 | |
Actuarial gain(2) | | | (8,351 | ) | | | (3,365 | ) | | | (8,134 | ) | | | (8,351 | ) |
| Benefits paid | | | (23,328 | ) | | | (25,806 | ) | | | (20,009 | ) | | | (23,328 | ) |
| | | | | | | | | | | |
| Ending benefit obligations | | $ | 297,319 | | | $ | 295,549 | | |
| Ending Benefit Obligations | | | $ | 304,341 | | | $ | 297,319 | |
| | | | | | | | | | | |
| Accumulated benefit obligations | | $ | 297,319 | | | $ | 295,549 | | | $ | 304,341 | | | $ | 297,319 | |
| | | | | | | | | | | |
| | |
(1) | | The increase in plan amendments in 2007 represents an accelerated vesting schedule adopted during the year. |
|
(2) | | The increase in the actuarial gain in 2007 primarily reflects the increase in the discount rate, partially offset by an unfavorable change in demographics. |
The following is a reconciliation of the U.S. defined benefit pension plans’ assets:
| | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | | December 31, | |
| | | 2007 | | 2006 | | | 2008 | | 2007 | |
| | | (Amounts in thousands) | | | (Amounts in thousands) | |
| |
| Beginning plan assets | | $ | 242,045 | | | $ | 207,155 | | | $ | 251,215 | | | $ | 242,045 | |
Return on plan assets | | | 16,369 | | | | 24,391 | | | | (85,960 | ) | | | 16,369 | |
| Company contributions | | | 16,129 | | | | 36,305 | | | | 50,797 | | | | 16,129 | |
| Benefits paid | | | (23,328 | ) | | | (25,806 | ) | | | (20,009 | ) | | | (23,328 | ) |
| | | | | | | | | | | |
| Ending plan assets | | $ | 251,215 | | | $ | 242,045 | | | $ | 196,043 | | | $ | 251,215 | |
| | | | | | | | | | | |
| | |
| (1) | | The significant decline in return on plan assets in 2008 is primarily a result of recent declines in global debt and equity markets, and will be amortized to income over the remaining expected service period. |
We contributed $16.1$50.8 million and $36.3$16.1 million to the U.S. defined benefit pension plans during 20072008 and 2006,2007, respectively. These payments exceeded the minimum funding requirements mandated by the U.S. Department of Labor rules. During 2007, returns onOur estimated contribution in 2009 is expected to be between $55 million and $75 million. The following table summarizes the expected cash activity for the U.S. defined benefit pension plan assets were slightly lower than anticipated. During 2006, returns on pension plan assets were greater than anticipated.plans in the future (amounts in millions):
| | | | | |
| Expected benefit payments: | | | | |
| 2009 | | $ | 29.3 | |
| 2010 | | | 31.8 | |
| 2011 | | | 31.2 | |
| 2012 | | | 32.0 | |
| 2013 | | | 33.9 | |
| 2014-2018 | | | 176.1 | |
8892
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Although we are still working with our actuaries to determine estimated funding beyond 2007, the following table summarizes the expected cash activity for the U.S. defined benefit pension plans in the future (in millions):
| | | | | |
| Company contributions — 2008 | | $ | 30.4 | |
| Expected benefit payments: | | | | |
| 2008 | | $ | 25.5 | |
| 2009 | | | 28.0 | |
| 2010 | | | 28.5 | |
| 2011 | | | 27.3 | |
| 2012 | | | 28.6 | |
| 2013-2017 | | | 161.1 | |
The asset allocation for the U.S. defined benefit pension plans at the end of 20072008 and 2006, and the target allocation for 2008,2007 by asset category, are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Target Allocation at December 31, | | Percentage of Actual Plan Assets at December 31, | | | | | Percentage of Actual Plan
|
Asset Category | | 2007 | | 2006 | | 2007 | | 2006 | | |
| | | | Target Allocation at December 31, | | Assets at December 31, |
Asset category | | | 2008 | | 2007 | | 2008 | | 2007 |
| |
| Equity securities | | | 65 | % | | | 65 | % | | | 65 | % | | | 65 | % | | | 65 | % | | | 65 | % | | | 66 | % | | | 65 | % |
| Fixed income | | | 25 | % | | | 25 | % | | | 25 | % | | | 25 | % | | | 35 | % | | | 25 | % | | | 30 | % | | | 25 | % |
| Other | | | 10 | % | | | 10 | % | | | 10 | % | | | 10 | % | | | 0 | % | | | 10 | % | | | 4 | % | | | 10 | % |
We do not believe that anyNone of our common stock is directly held by our plans. Our investment strategy is to invest in various securities in order to pay retirement benefits to plan participants while minimizing our cash contributions over the life of the plan. This is accomplished by preserving capital through diversified investments in high quality instruments and earning a long-term rate of return consistent with an acceptable degree of risk, while taking into account the liquidity needs of the plan.
Our investment policy is to invest approximately 65% of plan assets in equity securities 25%and 35% in fixed income securities and 10% in other assets.securities. Within each investment category, assets are allocated to various investment styles. Professional money management firms manage all assets, and we engage a consultant to assist in evaluating these activities. We periodically review the investment policy, generally in conjunction with an asset and liability study. We also regularly rebalance the actual allocation to our target investment allocation.
Non-U.S. Defined Benefit Plans — We maintain defined benefit pension plans, which cover some or all of the employees in the following countries: Austria, Canada, France, Germany, India, Indonesia, Italy, Japan, Mexico, the Netherlands, Sweden and United Kingdom.
Net defined benefit pension expense fornon-U.S. pension plans was:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | | Year Ended December 31, | |
| | | 2007 | | 2006 | | 2005 | | | 2008 | | 2007 | | 2006 | |
| | | (Amounts in thousands) | | | (Amounts in thousands) | |
| |
| Service cost | | $ | 4,576 | | | $ | 6,019 | | | $ | 5,087 | | | $ | 3,631 | | | $ | 4,576 | | | $ | 6,019 | |
| Interest cost | | | 12,466 | | | | 10,795 | | | | 10,663 | | | | 13,372 | | | | 12,466 | | | | 10,795 | |
| Expected return on plan assets | | | (7,516 | ) | | | (6,006 | ) | | | (5,740 | ) | | | (5,429 | ) | | | (7,516 | ) | | | (6,006 | ) |
Settlement and curtailment of benefits(1) | | | 363 | | | | 745 | | | | 43 | | | | 40 | | | | 363 | | | | 745 | |
| Amortization of unrecognized net loss | | | 1,715 | | | | 2,483 | | | | 1,403 | | | | 375 | | | | 1,715 | | | | 2,483 | |
| | | | | | | | | | | | | | | |
Non-U.S. pension expense | | $ | 11,604 | | | $ | 14,036 | | | $ | 11,456 | | |
Non-U.S. net pension expense | | | $ | 11,989 | | | $ | 11,604 | | | $ | 14,036 | |
| | | | | | | | | | | | | | | |
| | |
(1) | | The increase in settlement and curtailment of benefits in 2006 is due to the conversion of a defined benefit plan in Canada to a defined contribution plan. |
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FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The estimated net loss for the defined benefit pension plans that will be amortized from accumulated other comprehensive loss intonon-U.S. expense in 20082009 is $0.4$2.4 million.
The following summarizes the net pension liability fornon-U.S. plans:
| | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2007 | | | 2006 | |
| | | (Amounts in thousands) | |
| |
| Benefit obligation | | $ | 257,664 | | | $ | 264,053 | |
| Plan assets, at fair value | | | 131,128 | | | | 123,093 | |
| | | | | | | | | |
| Funded status | | $ | (126,536 | ) | | $ | (140,960 | ) |
| | | | | | | | | |
| Accumulated other comprehensive loss, net of tax: | | | | | | | | |
| Unrecognized net loss | | $ | (22,695 | ) | | $ | (38,045 | ) |
| Net deferred tax liability (asset) | | | 541 | | | | (4,572 | ) |
| Net amount recognized | | | (104,382 | ) | | | (98,343 | ) |
| | | | | | | | | |
| Funded status | | $ | (126,536 | ) | | $ | (140,960 | ) |
| | | | | | | | | |
| | | | | | | | | |
| | | December 31, | |
| | | 2008 | | | 2007 | |
| | | (Amounts in thousands) | |
| |
| Benefit Obligation | | $ | 228,070 | | | $ | 257,664 | |
| Plan assets, at fair value | | | 92,935 | | | | 131,128 | |
| | | | | | | | | |
| Funded status | | $ | (135,135 | ) | | $ | (126,536 | ) |
| | | | | | | | | |
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FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | |
| (1) | | The net deferred tax liability in 2007 includes the effect of the reversal of a valuation allowance in 2007. See Note 17 for discussion of valuation allowances. |
The following summarizes amounts recognized in the balance sheet fornon-U.S. plans:
| | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | | Year Ended December 31, | |
| | | 2007 | | 2006 | | | 2008 | | 2007 | |
| | | (Amounts in thousands) | | | (Amounts in thousands) | |
| |
| Noncurrent assets | | $ | 764 | | | $ | 247 | | | $ | 446 | | | $ | 764 | |
| Current liabilities | | | (6,898 | ) | | | (6,280 | ) | | | (6,686 | ) | | | (6,898 | ) |
| Noncurrent liabilities | | | (120,402 | ) | | | (134,927 | ) | | | (128,895 | ) | | | (120,402 | ) |
| | | | | | | | | | | |
| Funded status | | $ | (126,536 | ) | | $ | (140,960 | ) | | $ | (135,135 | ) | | $ | (126,536 | ) |
| | | | | | | | | | | |
The following table shows the change in accumulated other comprehensive loss attributable to the components of the net cost and the change in benefit obligationsBenefit Obligations fornon-U.S. plans:plans, net of tax:
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Year Ended December 31, | |
| | | 2007 | | 2006 | | 2005 | | | 2008 | | 2007 | | 2006 | |
| | | (Amounts in thousands) | | | (Amounts in thousands) | |
| |
| Balance — January 1 | | $ | (38,045 | ) | | $ | (22,110 | ) | | $ | (8,434 | ) | | $ | (22,695 | ) | | $ | (38,045 | ) | | $ | (22,110 | ) |
| Increase (decrease) in minimum liability included in other comprehensive income prior to adoption of SFAS No. 158 | | | — | | | | 8,563 | | | | (13,676 | ) | | | — | | | | — | | | | 8,563 | |
| Adoption of SFAS No. 158 | | | — | | | | (24,498 | ) | | | — | | | | — | | | | — | | | | (24,498 | ) |
| Amortization of net loss | | | 1,578 | | | | — | | | | — | | | | 255 | | | | 1,578 | | | | — | |
| Net gain arising during the year | | | 14,817 | | | | — | | | | — | | |
| Currency exchange impact | | | (1,045 | ) | | | — | | | | — | | |
| Net (loss) gain arising during the year | | | | (18,001 | ) | | | 14,817 | | | | — | |
| Currency translation impact | | | | 6,285 | | | | (1,045 | ) | | | — | |
| | | | | | | | | | | | | | | |
| Balance — December 31 | | $ | (22,695 | ) | | $ | (38,045 | ) | | $ | (22,110 | ) | | $ | (34,156 | ) | | $ | (22,695 | ) | | $ | (38,045 | ) |
| | | | | | | | | | | | | | | |
| | | | | | | | | |
| | | December 31, | |
| | | 2008 | | | 2007 | |
| | | (Amounts in thousands) | |
| |
| Unrecognized net loss | | $ | (34,156 | ) | | $ | (22,695 | ) |
| | | | | | | | | |
| Accumulated other comprehensive loss, net of tax: | | $ | (34,156 | ) | | $ | (22,695 | ) |
| | | | | | | | | |
The following are assumptions related to thenon-U.S. defined benefit pension plans:
| | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2008 | | | 2007 | | | 2006 | |
| |
| Weighted average assumptions used to determine Benefit Obligations: | | | | | | | | | | | | |
| Discount rate | | | 5.47 | % | | | 5.61 | % | | | 4.78 | % |
| Rate of increase in compensation levels | | | 3.07 | | | | 3.32 | | | | 3.23 | |
| Weighted average assumptions used to determine net pension expense: | | | | | | | | | | | | |
| Long-term rate of return on assets | | | 4.35 | % | | | 5.91 | % | | | 5.46 | % |
| Discount rate | | | 5.61 | | | | 4.78 | | | | 4.43 | |
| Rate of increase in compensation levels | | | 3.32 | | | | 3.23 | | | | 3.19 | |
At December 31, 2008 as compared to December 31, 2007, we decreased our average discount rate fornon-U.S. plans from 5.61% to 5.47% based primarily on lower yields of investment grade corporate bonds in the
9094
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following are assumptions relatedUnited Kingdom. We decreased our average rate of return on assets from 5.91% at December 31, 2007 to 4.35% at December 31, 2008. As thenon-U.S. defined benefit pension plans:
| | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2007 | | | 2006 | | | 2005 | |
| | | (Amounts in thousands) | |
| |
| Weighted average assumptions used to determine benefit obligations: | | | | | | | | | | | | |
| Discount rate | | | 5.61 | % | | | 4.78 | % | | | 4.43 | % |
| Rate of increase in compensation levels | | | 3.32 | | | | 3.23 | | | | 3.19 | |
| Weighted average assumptions used to determine net cost: | | | | | | | | | | | | |
| Long-term rate of return on assets | | | 5.91 | % | | | 5.46 | % | | | 6.00 | % |
| Discount rate | | | 4.78 | | | | 4.43 | | | | 5.12 | |
| Rate of increase in compensation levels | | | 3.23 | | | | 3.19 | | | | 3.05 | |
expected rate of return on plan assets is long-term in nature, short-term market changes do not significantly impact the rates.
Many of ournon-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 return premiums generated by active investment management.class.
The following is a reconciliation of thenon-U.S. plans’ defined benefit pension obligations:
| | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | | December 31, | |
| | | 2007 | | 2006 | | | 2008 | | 2007 | |
| | | (Amounts in thousands) | | | (Amounts in thousands) | |
| |
| Beginning benefit obligations | | $ | 264,053 | | | $ | 239,758 | | |
| Beginning Benefit Obligations | | | $ | 257,664 | | | $ | 264,053 | |
| Service cost | | | 4,576 | | | | 6,019 | | | | 3,631 | | | | 4,576 | |
| Interest cost | | | 12,466 | | | | 10,795 | | | | 13,372 | | | | 12,466 | |
| Employee contributions | | | 751 | | | | 627 | | | | 709 | | | | 751 | |
| Plan amendments, curtailments and other | | | (109 | ) | | | 29 | | | | — | | | | (109 | ) |
| Plan settlements(1) | | | — | | | | (4,167 | ) | |
| Actuarial gain(2) | | | (23,863 | ) | | | (6,752 | ) | |
| Actuarial loss (gain)(1) | | | | 8,986 | | | | (23,863 | ) |
| Net benefits and expenses paid | | | (14,981 | ) | | | (11,553 | ) | | | (15,063 | ) | | | (14,981 | ) |
| Currency exchange impact | | | 14,771 | | | | 29,297 | | |
| | | | | | | |
| Ending benefit obligations | | $ | 257,664 | | | $ | 264,053 | | |
| Currency translation impact(2) | | | | (41,229 | ) | | | 14,771 | |
| Ending Benefit Obligations | | | $ | 228,070 | | | $ | 257,664 | |
| | | | | | | | | | | |
| Accumulated benefit obligations | | $ | 237,707 | | | $ | 242,219 | | | $ | 211,699 | | | $ | 237,707 | |
| | | | | | | | | | | |
| | |
| (1) | | The plan settlementactuarial loss in 2006 represents2008 primarily reflects the conversionimpact of a defined benefitexperience losses in the plan in Canada to a defined contribution plan.the United Kingdom. |
| |
| (2) | | The increasedecrease in the actuarial gaincurrency translation impact in 2008 as compared with 2007 primarily reflects the increasestrengthening of the U.S. dollar exchange rate against our significant currencies, primarily the British pound and the Euro. |
The following is a reconciliation of thenon-U.S. plans’ defined benefit pension assets:
| | | | | | | | | |
| | | December 31, | |
| | | 2008 | | | 2007 | |
| | | (Amounts in thousands) | |
| |
| Beginning plan assets | | $ | 131,128 | | | $ | 123,093 | |
| Return on plan assets(1) | | | (14,909 | ) | | | 3,123 | |
| Employee contributions | | | 709 | | | | 751 | |
| Company contributions | | | 20,234 | | | | 16,216 | |
| Currency translation impact(2) | | | (29,164 | ) | | | 2,926 | |
| Net benefits and expenses paid | | | (15,063 | ) | | | (14,981 | ) |
| | | | | | | | | |
| Ending plan assets | | $ | 92,935 | | | $ | 131,128 | |
| | | | | | | | | |
| | |
| (1) | | The significant decline in return on plan assets in 2008 is primarily a result of recent declines in global debt and equity markets. The losses that will be amortized to income over the remaining service period. |
|
| (2) | | The decrease in the discount rate.currency translation impact in 2008 as compared with 2007 reflects the strengthening of the U.S. dollar exchange rate against our significant currencies, primarily the British pound and the Euro. |
9195
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following is a reconciliation of thenon-U.S. plans’ defined benefit pension assets:
| | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2007 | | | 2006 | |
| | | (Amounts in thousands) | |
| |
| Beginning plan assets | | $ | 123,093 | | | $ | 104,475 | |
| Return on plan assets | | | 3,123 | | | | 7,873 | |
| Employee contributions | | | 751 | | | | 627 | |
| Company contributions | | | 16,216 | | | | 11,634 | |
| Currency exchange impact | | | 2,926 | | | | 13,841 | |
| Plan settlements(1) | | | — | | | | (4,063 | ) |
| Acquisitions | | | — | | | | 259 | |
| Net benefits and expenses paid | | | (14,981 | ) | | | (11,553 | ) |
| | | | | | | | | |
| Ending plan assets | | $ | 131,128 | | | $ | 123,093 | |
| | | | | | | | | |
| | |
(1) | | The plan settlement in 2006 represents the conversion of a defined benefit plan in Canada to a defined contribution plan. |
The following table summarizes the expected cash activity for thenon-U.S. defined benefit plans in the future (in(amounts in millions):
| | | | | | | | | |
| Company contributions — 2008 | | $ | 12.6 | | |
| Estimated company contributions — 2009 | | | $ | 12.8 | |
| Expected benefit payments: | | | | | | | | |
| 2008 | | $ | 11.5 | | |
| 2009 | | | 12.0 | | | $ | 9.7 | |
| 2010 | | | 11.9 | | | | 9.4 | |
| 2011 | | | 12.7 | | | | 10.5 | |
| 2012 | | | 13.3 | | | | 12.1 | |
| 2013-2017 | | | 49.6 | | |
| 2013 | | | | 11.5 | |
| 2014-2018 | | | | 72.6 | |
The asset allocations for thenon-U.S. defined benefit pension plans at the end of 20072008 and 20062007 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Target Allocation at December 31, | | Percentage of Actual Plan Assets at December 31, | | | | | Percentage of Actual Plan
|
Asset Category | | 2007 | | 2006 | | 2007 | | 2006 | | |
| | | | Target Allocation at December 31, | | Assets at December 31, |
Asset category | | | 2008 | | 2007 | | 2008 | | 2007 |
| |
| Equity securities | | | 50 | % | | | 48 | % | | | 50 | % | | | 50 | % | | | 48 | % | | | 50 | % | | | 47 | % | | | 50 | % |
| Fixed income | | | 50 | % | | | 41 | % | | | 47 | % | | | 38 | % | | | 51 | % | | | 50 | % | | | 51 | % | | | 47 | % |
| Other | | | 0 | % | | | 11 | % | | | 3 | % | | | 12 | % | | | 1 | % | | | 0 | % | | | 2 | % | | | 3 | % |
We do not believe that anyNone of our common stock is held directly by these plans. In all cases, our investment strategy for these plans is to invest in various securities in order to pay retirement benefits to plan participants while minimizing required cash contributions over the life of the plan. This is accomplished by preserving capital through diversification in high quality investments and earning a long-term rate of return consistent with an acceptable degree of risk and the legal requirements of the particular country, while taking into account the liquidity needs of the plan.
Asset allocation differs by plan based upon the plan’s projected benefit obligationBenefit Obligation to participants as well as the results of asset and liability studies that are conducted for each plan. Professional money management firms manage all plan assets and we engage consultants in each country to assist in evaluation of these activities.
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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 plans whose accumulated benefit obligations exceed the fair value of their respective plan assets.
| | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | | December 31, | |
| | | 2007 | | 2006 | | | 2008 | | 2007 | |
| | | (Amounts in thousands) | | | (Amounts in thousands) | |
| |
| Projected benefit obligation | | $ | 453,316 | | | $ | 439,199 | | |
| Benefit Obligation | | | $ | 530,944 | | | $ | 453,316 | |
| Accumulated benefit obligation | | | 447,339 | | | | 433,398 | | | | 515,128 | | | | 447,339 | |
| Fair value of plan assets | | | 282,585 | | | | 258,226 | | | | 287,113 | | | | 282,585 | |
Postretirement Medical Plans — We sponsor several defined benefit postretirement health care plans covering most 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 are paid and we incur health maintenance organization premiums, 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.
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FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Net postretirement benefit expense for postretirement medical plans was:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | | Year Ended December 31, | |
| | | 2007 | | 2006 | | 2005 | | | 2008 | | 2007 | | 2006 | |
| | | (Amounts in thousands) | | | (Amounts in thousands) | |
| |
| Service cost | | $ | 87 | | | $ | 106 | | | $ | 122 | | | $ | 67 | | | $ | 87 | | | $ | 106 | |
| Interest cost | | | 3,675 | | | | 3,842 | | | | 4,139 | | | | 3,531 | | | | 3,675 | | | | 3,842 | |
| Amortization of unrecognized prior service benefit | | | (4,285 | ) | | | (4,329 | ) | | | (4,147 | ) | | | (2,514 | ) | | | (4,285 | ) | | | (4,329 | ) |
| Amortization of unrecognized net loss | | | 466 | | | | 1,054 | | | | 683 | | | | 33 | | | | 466 | | | | 1,054 | |
| | | | | | | | | | | | | | | |
| Postretirement benefit expense | | $ | (57 | ) | | $ | 673 | | | $ | 797 | | |
| Net postretirement benefit expense (income) | | | $ | 1,117 | | | $ | (57 | ) | | $ | 673 | |
| | | | | | | | | | | | | | | |
The estimated prior service benefit for postretirement medical plans that will be amortized from accumulated other comprehensive loss into U.S. pension expense in 20082009 is $2.5$2.0 million. The estimated net lossgain for postretirement medical plans that will be amortized from accumulated other comprehensive loss into U.S. expense in 20082009 is $0.1$2.4 million.
The following summarizes the accrued postretirement benefits liability for the postretirement medical plans:
| | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2007 | | | 2006 | |
| | | (Amounts in thousands) | |
| |
| Postretirement benefit obligation | | $ | 62,267 | | | $ | 71,382 | |
| | | | | | | | | |
| Funded status | | $ | (62,267 | ) | | $ | (71,382 | ) |
| | | | | | | | | |
| Accumulated other comprehensive loss, net of tax: | | | | | | | | |
| Unrecognized net loss | | $ | (2,792 | ) | | $ | (7,340 | ) |
| Unrecognized prior service benefit | | | 5,128 | | | | 7,785 | |
| Deferred tax liability | | | 1,309 | | | | 258 | |
| Net amount recognized | | | (65,912 | ) | | | (72,085 | ) |
| | | | | | | | | |
| Funded status | | $ | (62,267 | ) | | $ | (71,382 | ) |
| | | | | | | | | |
| | | | | | | | | |
| | | December 31, |
| | | 2008 | | 2007 |
| | | (Amounts in thousands) |
| |
| Postretirement Benefit Obligation | | $ | 43,064 | | | $ | 62,267 | |
| | | | | | | | | |
| Funded status | | $ | (43,064 | ) | | $ | (62,267 | ) |
| | | | | | | | | |
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FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following summarizes amounts recognized in the balance sheet for postretirement benefits:
| | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | | December 31, | |
| | | 2007 | | 2006 | | | 2008 | | 2007 | |
| | | (Amounts in thousands) | | | (Amounts in thousands) | |
| |
| Current liabilities | | $ | (7,285 | ) | | $ | (7,942 | ) | | $ | (6,199 | ) | | $ | (7,285 | ) |
| Noncurrent liabilities | | | (54,982 | ) | | | (63,440 | ) | | | (36,865 | ) | | | (54,982 | ) |
| | | | | | | | | | | |
| Funded status | | $ | (62,267 | ) | | $ | (71,382 | ) | | $ | (43,064 | ) | | $ | (62,267 | ) |
| | | | | | | | | | | |
The following table shows the change in accumulated other comprehensive loss attributable to the components of the net cost and the change in benefit obligationsBenefit Obligations for postretirement benefits:benefits, net of tax:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2007 | | 2006 | | 2005 | | | Year Ended December 31, | |
| | | (Amounts in thousands) | | | 2008 | | 2007 | | 2006 | |
| | | (Amounts in thousands) | |
| �� | |
| Balance — January 1 | | $ | 445 | | | $ | — | | | $ | — | | | $ | 2,336 | | | $ | 445 | | | $ | — | |
| Adoption of SFAS No. 158 | | | — | | | | 445 | | | | — | | | | — | | | | — | | | | 445 | |
| Amortization of net loss | | | 299 | | | | — | | | | — | | | | 21 | | | | 299 | | | | — | |
| Amortization of prior service benefit | | | (2,745 | ) | | | — | | | | — | | | | (1,611 | ) | | | (2,745 | ) | | | — | |
| Net gain arising during the year | | | 4,337 | | | | — | | | | — | | | | 12,437 | | | | 4,337 | | | | — | |
| | | | | | | | | | | | | | | |
| Balance — December 31 | | $ | 2,336 | | | $ | 445 | | | $ | — | | | $ | 13,183 | | | $ | 2,336 | | | $ | 445 | |
| | | | | | | | | | | | | | | |
The following is a reconciliation of the accumulated postretirement benefits obligation:
| | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2007 | | | 2006 | |
| | | (Amounts in thousands) | |
| |
| Beginning accumulated postretirement benefit obligation | | $ | 71,382 | | | $ | 73,794 | |
| Service cost | | | 87 | | | | 106 | |
| Interest cost | | | 3,675 | | | | 3,842 | |
| Employee contributions | | | 2,950 | | | | 2,687 | |
| Medicare subsidies receivable | | | 500 | | | | 500 | |
| Actuarial gain(1) | | | (6,761 | ) | | | (503 | ) |
| Net benefits and expenses paid | | | (9,566 | ) | | | (9,044 | ) |
| | | | | | | | | |
| Ending accumulated postretirement benefit obligation | | $ | 62,267 | | | $ | 71,382 | |
| | | | | | | | | |
| | |
(1) | | The increase in the actuarial gain in 2007 as compared with 2006 primarily reflects the increase in the discount rate and favorable demographic experience. |
The following presents expected benefit payments for future periods:
| | | | | | | | | |
| | | Expected
| | | Medicare
| |
| | | Cash Flows | | | Subsidy | |
| | | (Amounts in millions) | |
| |
| 2008 | | $ | 7.3 | | | $ | 0.5 | |
| 2009 | | | 7.1 | | | | 0.6 | |
| 2010 | | | 7.0 | | | | 0.5 | |
| 2011 | | | 6.7 | | | | 0.5 | |
| 2012 | | | 6.2 | | | | 0.5 | |
| 2013-2017 | | | 25.7 | | | | 2.1 | |
9497
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | |
| | | December 31, | |
| | | 2008 | | | 2007 | |
| | | (Amounts in thousands) | |
| |
| Unrecognized net gain (loss) | | $ | 9,666 | | | $ | (2,792 | ) |
| Unrecognized prior service benefit | | | 3,517 | | | | 5,128 | |
| | | | | | | | | |
| Accumulated other comprehensive loss, net of tax: | | $ | 13,183 | | | $ | 2,336 | |
| | | | | | | | | |
The following is a reconciliation of the postretirement Benefits Obligation:
| | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2008 | | | 2007 | |
| | | (Amounts in
| |
| | | thousands) | |
| |
| Beginning postretirement Benefit Obligation | | $ | 62,267 | | | $ | 71,382 | |
| Service cost | | | 67 | | | | 87 | |
| Interest cost | | | 3,531 | | | | 3,675 | |
| Employee contributions | | | 2,935 | | | | 2,950 | |
| Medicare subsidies receivable | | | 500 | | | | 500 | |
| Actuarial gain(1) | | | (19,412 | ) | | | (6,761 | ) |
| Net benefits and expenses paid | | | (6,824 | ) | | | (9,566 | ) |
| | | | | | | | | |
| Ending postretirement Benefit Obligation | | $ | 43,064 | | | $ | 62,267 | |
| | | | | | | | | |
| | |
| (1) | | The increase in the actuarial gain in 2008 primarily reflects the impact of the changes in assumptions related to employee retention rates in the plans based on recent trends. |
The following presents expected benefit payments for future periods (amounts in millions):
| | | | | | | | | |
| | | Expected
| | | Medicare
| |
| | | Payments | | | Subsidy | |
| |
| 2009 | | $ | 6.2 | | | $ | 0.4 | |
| 2010 | | | 5.7 | | | | 0.4 | |
| 2011 | | | 5.1 | | | | 0.3 | |
| 2012 | | | 4.6 | | | | 0.3 | |
| 2013 | | | 4.2 | | | | 0.3 | |
| 2014-2018 | | | 16.3 | | | | 1.2 | |
The following are assumptions related to the postretirement benefits:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | | Year Ended December 31, | |
| | | 2007 | | 2006 | | 2005 | | | 2008 | | 2007 | | 2006 | |
| |
| Weighted average assumptions used to determine benefit obligations: | | | | | | | | | | | | | |
| Weighted average assumptions used to determine Benefit Obligations: | | | | | | | | | | | | | |
| Discount rate | | | 6.25 | % | | | 5.75 | % | | | 5.50 | % | | | 6.50 | % | | | 6.25 | % | | | 5.75 | % |
| Weighted average assumptions used to determine net cost: | | | | | | | | | | | | | |
| Weighted average assumptions used to determine net expense: | | | | | | | | | | | | | |
| Discount rate | | | 5.75 | % | | | 5.50 | % | | | 5.75 | % | | | 6.25 | % | | | 5.75 | % | | | 5.50 | % |
| Expected return on plan assets | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
The assumed ranges for the annual rates of increase in per capitamedical costs used to determine net expense were 7.8% for periods prior to Medicare were2008, 8.8% for 2007 and 9.0% for 2006, and 8.0% for 2005, with a gradual decrease to 5.0% for 2012 and future years.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Assumed heath 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 20072008 reported amounts:amounts (in thousands):
| | | | | | | | | | | | | | | | | |
| | | 1% Increase | | 1% Decrease | | 1% Increase | | 1% Decrease |
| | | (Amounts in thousands) |
| | |
| Effect on postretirement benefit obligation | | $ | 1,490 | | | $ | (1,333 | ) | |
| Effect on postretirement Benefit Obligation | | | $ | 826 | | | $ | (749 | ) |
| Effect on service cost plus interest cost | | | 86 | | | | (77 | ) | | | 80 | | | | (72 | ) |
We made contributions to the postretirement medical plans to pay benefits of $3.9 million in 2008, $6.6 million in 2007 and $6.4 million in 2006 and $8.2 million in 2005.2006. 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.
Defined Contribution Plans — We sponsor several defined contribution plans covering substantially all U.S. and Canadian employees and certain othernon-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 $13.0 million in 2008, $8.0 million in 2007 and $6.8 million in 20062006. In 2008, we discontinued discretionary contributions for the defined contribution plan in the U.S., and $7.6 million in 2005.increased our matching contributions by 25%.
Participants in the U.S. defined contribution plan have the option to invest in our common stock and discretionary contributions by us arewere typically funded with our common stock; therefore, the plans assets include such holdings of our common stock.
| |
13.14. | LEGAL MATTERS AND CONTINGENCIES |
Asbestos — RelatedAsbestos-Related Claims
We are a defendant in a large number of pending lawsuits (which include, in many cases, multiple claimants) that seek to recover damages for personal injury allegedly caused by exposure to asbestos-containing products manufacturedand/or distributed by us in the past. While the aggregate number of asbestos-related claims against us has declined in recent years, there can be no assurance that this trend will continue. Asbestos associated withcontinue, and the average cost per claim has increased. Asbestos-containing materials incorporated into any such products waswere primarily encapsulated and used only as components of process equipment, and we do not believe that any significant emission of asbestosasbestos-containing fibers occurred during the use of this equipment. We believe that a high percentage of the claims are covered by applicable insurance or indemnities from other companies.
Shareholder Litigation — Appeal of Dismissed Class Action andCase; Derivative Cases.Case Dismissals
In 2003, related lawsuits were filed in federal court in the Northern District of Texas, (the “Court”), alleging that we violated federal securities laws. After these cases were consolidated, the lead plaintiff amended its complaint several times. The lead plaintiff’s last pleading was the fifth consolidated amended complaint (the “Complaint”). The Complaint alleged that federal securities violations occurred between February 6, 2001 and
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FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
September 27, 2002 and named as defendants our Company,company, C. Scott Greer, our former Chairman, President and Chief Executive Officer, Renee J. Hornbaker, our former Vice President and Chief Financial Officer, PricewaterhouseCoopers LLP, our independent registered public accounting firm, and Banc of America Securities LLC and Credit Suisse First Boston LLC, which served as underwriters for our two public stock offerings during the relevant period. The Complaint asserted claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (“Exchange(the “Exchange Act”), andRule 10b-5 thereunder, and Sections 11 and 15 of the Securities Act of 1933 (“Securities(the “Securities Act”). The lead plaintiff sought unspecified compensatory damages, forfeiture by Mr. Greer and Ms. Hornbaker of unspecified incentive-based or equity-based compensation and profits from any stock sales and recovery of costs. By Ordersorders dated November 13, 2007 and January 4, 2008, the Courtcourt denied the plaintiffs’ motion for class certification and granted summary judgment in favor of the defendants on all claims. The plaintiffs have appealed both rulings.rulings to the federal Fifth
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FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Circuit Court of Appeals. The appellate briefing is complete and oral argument was held on February 2, 2009 and, to date, there have been no further developments. We will defend vigorously anythis appeal or any other effort by the plaintiffs to overturn the Court’scourt’s denial of class certification or its entry of judgment in favor of us and the other defendants.
In 2005, a shareholder derivative lawsuit was filed purportedly on our behalf in the 193rd Judicial District of Dallas County, Texas. The lawsuit originally named as defendants Mr. Greer, Ms. Hornbaker, and former and current board members Hugh K. Coble, George T. Haymaker, Jr., William C. Rusnack, Michael F. Johnston, Charles M. Rampacek, Kevin E. Sheehan, Diane C. Harris, James O. Rollans and Christopher A. Bartlett. We were named as a nominal defendant. Based primarily on the purported misstatements alleged in the above-described federal securities case, the original lawsuit in this action asserted claims against the defendants for breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets and unjust enrichment. The plaintiff alleged that these purported violations of state law occurred between April 2000 and the date of suit. The plaintiff seekssought on our behalf an unspecified amount of damages, injunctive reliefand/or the imposition of a constructive trust on defendants’ assets, disgorgement of compensation, profits or other benefits received by the defendants from us and recovery of attorneys’ fees and costs. We filed a motion seeking dismissal of the case, and the court thereafter ordered the plaintiffs to replead. On October 11, 2007, the plaintiffs filed an amended petition adding new claims against the following additional defendants: Kathy Giddings, our former Vice-President and Corporate Controller; Bernard G. Rethore, our former Chairman and Chief Executive Officer; Banc of America Securities, LLC and Credit Suisse First Boston, LLC, which served as underwriters for our public stock offerings in November 2001 and April 2002, and PricewaterhouseCoopers, LLP, our independent registered public accounting firm. We continue to strongly believe thatOn April 2, 2008, the caselawsuit was improperly filed, and have filed a further motion seeking dismissal ofdismissed by the case.court without prejudice at the plaintiffs’ request.
On March 14, 2006, a shareholder derivative lawsuit was filed purportedly on our behalf in federal court in the Northern District of Texas. The lawsuit named as defendants Mr. Greer, Ms. Hornbaker, and former and current board members Mr. Coble, Mr. Haymaker, Mr. Lewis M. Kling, Mr. Rusnack, Mr. Johnston, Mr. Rampacek, Mr. Sheehan, Ms. Harris, Mr. Rollans and Mr. Bartlett. We were named as a nominal defendant. Based primarily on certain of the purported misstatements alleged in the above-described federal securities case, the plaintiff asserted claims against the defendants for breaches of fiduciary duty. The plaintiff allegedduty that the purported breaches of fiduciary dutypurportedly occurred between 2000 and 2004. The plaintiff sought on our behalf an unspecified amount of damages, disgorgement by Mr. Greer and Ms. Hornbaker of salaries, bonuses, restricted stock and stock options and recovery of attorneys’ fees and costs. Pursuant to a motion filed by us, the federal court dismissed that case on March 14, 2007, primarily on the basis that the case was not properly filed in federal court. On or about March 27, 2007, the same plaintiff re-filed essentially the same lawsuit naming the same defendants in the Supreme Court of the State of New York. We strongly believed that this new lawsuit was improperly filed in the Supreme Court of the State of New York and filed a motion seeking dismissal of the case. On January 2, 2008, the Courtcourt entered an order granting our motion to dismiss all claims and allowed the plaintiffs an opportunity to replead. A notice of entry of the dismissal order was served on the plaintiffsplaintiff on January 15, 2008. To date, the plaintiff has neither filed an amended complaint nor appealed the dismissal order.
United Nations Oil-for-Food Program
We have resolved investigations byentered into and disclosed previously in our SEC filings the Securities and Exchange Commission (“SEC”) andmaterial details of settlements with the SEC, the Department of Justice (“DOJ”(the “DOJ”) and the Dutch authorities relating to products that two of our foreign subsidiaries delivered to Iraq from 1996 through 2003 under the United Nations Oil-for-Food Program. TheseWe believe that a confidential French investigation may still be ongoing, and, accordingly, we cannot predict the outcome of the French investigation at this time. 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 us regarding its investigation, we may be subject to additional monetary and non-monetary penalties.
In addition to the settlements and 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 Flowserve and our two foreign subsidiaries have also been contacted bythat participated in the program. We intend to
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FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
governmental authorities in their respective countries concerning their involvement invigorously contest the United Nations Oil-for-Food Program. We engaged outside counsel in February 2006 to conduct an investigation of our foreign subsidiaries’ participation in the United Nations Oil-for-Food program. The outside counsel’s investigation has found evidence that, during the years 2001 through 2003, certainnon-U.S. personnel at the two foreign subsidiaries authorized payments in connection with certain of our product sales under the United Nations Oil-for-Food Program totaling approximately €600,000, which were subsequently deposited by third parties into Iraqi-controlled bank accounts. These payments were not authorized under the United Nations Oil-for-Food Programsuit, and were not properly documented in the foreign subsidiaries’ accounting records, but were expensed as paid.
We negotiated a settlement with the SEC in which, without admitting or denying the SEC’s allegations, we agreed to (i) a stipulated judgment enjoining us from future violations of the internal control and recordkeeping provisions of the federal securities laws, (ii) pay disgorgement of $2,720,861 plus prejudgment interest of $853,364 and (iii) pay a civil money penalty of $3 million.
Separately, we negotiated a resolution with DOJ. The resolution results in a deferred prosecution agreement under which we will pay a monetary penalty of $4,000,000.
We also believe that we have valid defenses to the Dutch investigation has effectively concluded and will be resolved with the Dutch subsidiary paying a penalty of approximately €265,000. We understand the French investigation is ongoing. Accordinglyclaims asserted. However, we cannot predict the outcome of the French investigationsuit at the present time or whether the resolution of this time. If the French authorities take enforcement action with regard to its investigation, we may be subject to additional monetary and non-monetary penalties.
We recorded expenses of approximately $11 million during 2007 for case resolution costs and related legal fees in the foregoing “Oil-for-Food” cases. We currently do not expect to incur further case resolution costs in this matter.
Wesuit will have improved and implemented new internal controls and taken certain disciplinary actions against persons who engaged in misconduct, violateda material adverse financial impact on our ethics policies or failed to cooperate fully in the investigation, including terminating the employment of certainnon-U.S. senior management personnel at one of our French subsidiaries. Othernon-U.S. senior management personnel at certain of our French and Dutch facilities involved in the above conduct had been previously separated from us for other reasons.company.
Export Compliance
In March 2006, we initiated a voluntary process to determine our compliance posture with respect to U.S. export control and economic sanctions laws and regulations. Upon initial investigation, it appeared that some product transactions and technology transfers were not handled in full compliance with U.S. export control laws and regulations. As a result, in conjunction with outside counsel, we are currently involved inconducted a voluntary systematic process to conduct further review, validationvalidate and voluntary disclosure of apparentvoluntarily disclose export violations discovered as part of this review process. We have completed approximately three-fourths ofour comprehensive disclosures to the site visits scheduled as part of this voluntary disclosure process, but currently believe this process will not be substantially complete and the results of site visits will not be fully analyzed untilappropriate U.S. government regulatory authorities at the end of 2008, given the complexityalthough these disclosures may be refined or supplemented. Based on our review of the data collected, during the self-disclosure period of October 1, 2002 through October 1, 2007, a number of process pumps, valves, mechanical seals and parts related thereto were exported, in limited circumstances, without required export lawsor reexport licenses or without full compliance with all applicable rules and regulations to a number of different countries throughout the currentworld, including certain U.S. sanctioned countries. The foregoing information is subject to revision as we further review this submittal with applicable U.S. regulatory authorities.
We have taken a number of actions to increase the effectiveness of our global scopeexport compliance program. This has included increasing the personnel and resources dedicated to export compliance, providing additional export compliance tools to employees, improving our export transaction screening processes and enhancing the content and frequency of the investigation. our export compliance training programs.
Any apparentself-reported violations of U.S. export control laws and regulations that are identified, confirmed and disclosed to the U.S. government may result in civil or criminal penalties, including finesand/or other penalties. Although companies making voluntary export disclosures have historically received reduced penalties and certain mitigating credits, legislation enacted on October 16, 2007 increased the maximum civil penalty for certain export control violations (assessed on a per-shipment basis) to the greater of $250,000 or twice the value of the transaction. While the Department of Commerce has stated that companies which had initiated voluntary self-disclosures prior to the enactment of this legislation generally would not be subjected to enhanced penalties retroactively, we are unable to determine at this time how other U.S. government agencies will apply this enhanced penalty legislation. Because our review into this issue is ongoing, weWe are currently unable to definitively determine the full extent of any apparent violations or the nature or total amount of penalties to which we might be subject to inas a result of any such self-reported violations of the future. Given that the resolution of this matter is uncertain at this
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FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
time, we cannot currently predict whether the final resolution of this matter will have a material adverse effect on our business, including our ability to do business outside the U.S., our financial condition or our results of operations. export control laws and regulations.
Other
We are currently involved as a potentially responsible party at fourtwo former public waste disposal sites that may be subject to remediation under pending government procedures. The sites are in various stages of evaluation by federal and state environmental authorities. The projected cost of remediation at these sites, as well as our alleged “fair share” allocation, iswill 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, and the identification and location of additional parties is continuing under applicable federal or state law. 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 volumesand/or toxicity of the wastes shown to have been disposed of at the sites. We believe that our exposure for existing disposal sites will be less than $100,000.
In addition to the above public disposal sites, we have received a Clean Up Notice on September 17, 2007 with respect to a site in Australia. The site was used for disposal of spent foundry sand. A risk assessment of the site is currently underway, but it will be several months before the assessment is completed. It is not currently believed that additional remediation costs at the site will be material.
We are also a defendant in severala number of other lawsuits, including product liability claims, that are insured, subject to the applicable deductibles, arising in the ordinary course of business. Based on currently available information,business, and we believe that we have adequately accrued estimated probable losses for such lawsuits.
We are also involved in ordinary routine litigation incidental to our business, none of which, either individually or in the aggregate, we believe to be 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 a significantan adverse impact on our financial position, operating results or cash flows for the reporting period in which any such resolution or disposition occurs.
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FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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. As a consequence of all legal matters, including settlements of both publicly disclosed litigation and otherwise, as well as revisions of prior estimates, we recognized net expenses of approximately $3 million, $9 million and $8 million in 2008, 2007 and $7 million in 2007, 2006 and 2005, respectively.2006. While additional exposures beyond these reserves could exist, they currently cannot be estimated. We will continue to evaluate these potential contingent loss exposures and, if they develop, recognize expense as soon as such losses become probable and can be reasonably estimated.
We have recorded reserves for product warranty claims that are included in both current and non-current liabilities. The following is a summary of the activity in the warranty reserve:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2007 | | 2006 | | 2005 | | | 2008 | | 2007 | | 2006 | |
| | | (Amounts in thousands) | | | (Amounts in thousands) | |
| |
| Balance — January 1 | | $ | 29,314 | | | $ | 29,737 | | | $ | 27,675 | | | $ | 34,471 | | | $ | 29,314 | | | $ | 29,737 | |
| Accruals for warranty expense, net of adjustments | | | 25,637 | | | | 23,418 | | | | 26,072 | | | | 32,428 | | | | 25,637 | | | | 23,418 | |
| Settlements made | | | (20,480 | ) | | | (23,841 | ) | | | (24,010 | ) | | | (29,963 | ) | | | (20,480 | ) | | | (23,841 | ) |
| | | | | | | | | | | | | | | |
| Balance — December 31 | | $ | 34,471 | | | $ | 29,314 | | | $ | 29,737 | | | $ | 36,936 | | | $ | 34,471 | | | $ | 29,314 | |
| | | | | | | | | | | | | | | |
On February 26, 2008, our Board of Directors authorized an increase in our quarterly cash dividend to $0.25 per share from $0.15 per share, effective for the first quarter of 2008. Generally, our dividend date-of-record is in the last month of the quarter, and the dividend is paid the following month.
On February 26, 2008, our Board of Directors authorized a program to repurchase up to $300.0 million of our outstanding common stock over an unspecified time period. The program commenced in the second quarter of 2008, and we repurchased 1.7 million shares for $165.0 million during 2008.
The provision for income taxes consists of the following:
| | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2008 | | | 2007 | | | 2006 | |
| | | (Amounts in thousands) | |
| |
| Current: | | | | | | | | | | | | |
| U.S. federal | | $ | 11,612 | | | $ | 24,640 | | | $ | 24,630 | |
| Non-U.S. | | | 135,797 | | | | 100,601 | | | | 53,442 | |
| State and local | | | 5,172 | | | | 3,211 | | | | 1,105 | |
| | | | | | | | | | | | | |
| Total current | | | 152,581 | | | | 128,452 | | | | 79,177 | |
| | | | | | | | | | | | | |
| Deferred: | | | | | | | | | | | | |
| U.S. federal | | | 3,250 | | | | 5,571 | | | | (1,355 | ) |
| Non-U.S. | | | (6,462 | ) | | | (22,106 | ) | | | (3,470 | ) |
| State and local | | | (1,648 | ) | | | (7,623 | ) | | | (1,114 | ) |
| | | | | | | | | | | | | |
| Total deferred | | $ | (4,860 | ) | | $ | (24,158 | ) | | $ | (5,939 | ) |
| | | | | | | | | | | | | |
| Total provision | | $ | 147,721 | | | $ | 104,294 | | | $ | 73,238 | |
| | | | | | | | | | | | | |
98102
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Cash dividends declared and paid were $0.60 and $0.45, respectively, per share in 2007. No cash dividends were declared or paid in 2006 or 2005.
On September 29, 2006, the Board of Directors authorized a program to repurchase up to 2.0 million shares of our outstanding common stock by the end of the second quarter of 2007. Shares were repurchased to offset potentially dilutive effects of stock options issued under our equity-based compensation programs. We repurchased a total of 2.0 million shares and concluded the program in the second quarter of 2007.
The provision (benefit) for income taxes consists of the following:
| | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2007 | | | 2006 | | | 2005 | |
| | | (Amounts in thousands) | |
| |
| Current: | | | | | | | | | | | | |
| U.S. federal | | $ | 24,640 | | | $ | 24,630 | | | $ | 7,404 | |
| Non-U.S | | | 100,601 | | | | 53,442 | | | | 44,813 | |
| State and local | | | 3,211 | | | | 1,105 | | | | 17 | |
| | | | | | | | | | | | | |
| Total current | | | 128,452 | | | | 79,177 | | | | 52,234 | |
| Deferred: | | | | | | | | | | | | |
| U.S. federal | | | 5,571 | | | | (1,355 | ) | | | (9,092 | ) |
| Non-U.S | | | (22,106 | ) | | | (3,470 | ) | | | (275 | ) |
| State and local | | | (7,623 | ) | | | (1,114 | ) | | | (2,284 | ) |
| | | | | | | | | | | | | |
| Total deferred | | $ | (24,158 | ) | | $ | (5,939 | ) | | $ | (11,651 | ) |
| | | | | | | | | | | | | |
| Total provision | | $ | 104,294 | | | $ | 73,238 | | | $ | 40,583 | |
| | | | | | | | | | | | | |
The expected cash payments for the current federal income tax expense for 2008, 2007 2006 and 20052006 were reduced by approximately $13.4$12.2 million, $18.8$12.4 million and $0.1$18.8 million, respectively, as a result of tax deductions related to the exercise of non-qualified employee stock 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 (benefit) for income taxes differs from the statutory corporate rate due to the following:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | | Year Ended December 31, | |
| | | 2007 | | 2006 | | 2005 | | | 2008 | | 2007 | | 2006 | |
| | | (Amounts in millions) | | | (Amounts in millions) | |
| |
| Statutory federal income tax at 35% | | $ | 126.0 | | | $ | 65.5 | | | $ | 32.2 | | | $ | 206.5 | | | $ | 126.0 | | | $ | 65.5 | |
| Foreign impact, net | | | (20.3 | ) | | | 4.7 | | | | 11.5 | | | | (50.8 | ) | | | (20.3 | ) | | | 4.7 | |
| Change in valuation allowances | | | (11.0 | ) | | | (2.5 | ) | | | (1.7 | ) | | | (6.5 | ) | | | (11.0 | ) | | | (2.5 | ) |
| State and local income taxes, net | | | 3.2 | | | | 0.8 | | | | 0.1 | | | | 3.5 | | | | 3.2 | | | | 0.8 | |
| Extraterritorial income exclusion | | | — | | | | (2.6 | ) | | | (1.9 | ) | | | — | | | | — | | | | (2.6 | ) |
| Meals and entertainment | | | 0.9 | | | | 0.8 | | | | 0.8 | | | | 1.2 | | | | 0.9 | | | | 0.8 | |
| Other | | | 5.5 | | | | 6.5 | | | | (0.4 | ) | | | (6.2 | ) | | | 5.5 | | | | 6.5 | |
| | | | | | | | | | | | | | | |
| Total | | $ | 104.3 | | | $ | 73.2 | | | $ | 40.6 | | | $ | 147.7 | | | $ | 104.3 | | | $ | 73.2 | |
| | | | | | | | | | | | | | | |
| Effective tax rate | | | 29.0 | % | | | 39.1 | % | | �� | 44.1 | % | | | 25.0 | % | | | 29.0 | % | | | 39.1 | % |
| | | | | | | | | | | | | | | |
99
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)The 2008 effective tax rate differed from the federal statutory rate of 35% primarily due to the net impact of foreign operations which includes the impacts of lower foreign tax rates, changes in our reserves established for uncertain tax positions pursuant to FIN No. 48, benefits arising from our permanent reinvestment in foreign subsidiaries, changes in valuation allowance estimates and a favorable tax ruling in Luxembourg. The net impact of discrete items included in the discussion above was approximately $22 million.
The 2007 effective tax rate differed from the federal statutory rate of 35% primarily due to the net impact of foreign operations, which includes the impacts of lower foreign tax rates and the net favorable results from various tax audits, and changes in valuation allowance estimates. These improvements were partially offset by additional reserves established for uncertain tax positions pursuant to our adoption of FIN No. 48, as discussed below.
The 2006 effective tax rate differed from the federal statutory rate of 35% primarily due to the net impact of foreign operations and certain U.S. non-deductible expenses.
The 2005 effective tax rate differed from the federal statutory rate of 35% primarily due to Extraterritorial Income (“ETI”) exclusion benefits of $1.9 million, state income tax benefits of $1.7 million resulting primarily from net reductions in valuation allowances and $11.5 million of net tax impact from foreign operations.
The net tax impact of foreign operations is lower in 2006 compared with prior years due to decreased levels of actual and deemed dividend repatriations and increased foreign tax credits associated with the 2006 repatriations. Additionally, on May 17, 2006, the Tax Increase Prevention and Reconciliation Act of 2005 was signed into law. This new legislation created an exclusion from U.S. taxable income for certain types of foreign related party payments of dividends, interest, rents and royalties which, prior to 2006, have been subject to U.S. taxation. This exclusion applied to certain of our 2006 payments made by foreign subsidiaries in 2007 and 2006.
SFAS No. 109, “Accounting for Income Taxes,” requires us to provide deferred taxes for the temporary differences associated with our investment in foreign subsidiaries which have a financial reporting basis that exceeds tax basis unless we can assert permanent reinvestment in foreign jurisdictions pursuant to APBAccounting Principles Board Opinion (“APB”) No. 23.23, “Accounting for Income Taxes — Special Areas.” Financial reporting basis and tax basis differences in investments in foreign subsidiaries consist of unremitted earnings and losses as well as foreign currency translation adjustments.
We do not assert permanent reinvestment under APB No. 23.23 on our unremitted foreign earnings. However, we do assert permanent reinvestment under APB No. 23 on certain portions of our initial invested capital in various foreign subsidiaries. During each of the three years reported in the period ended December 31, 2007,2008, 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. We had cash and deemed dividend distributions from our foreign subsidiaries that resulted in the recognition of approximately $7.5$27.1 million and $9$7.5 million of income tax expense during the years ended December 31, 20072008 and 2006,2007, 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.
103
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
On October 22, 2004, the American Jobs Creation Act of 2004 (the “2004 Act”) was signed into law, providing for a phase out of the existing ETI exclusion for foreign export sales, as it was viewed to be inconsistent with the international trade protocols set by the European Union. This phase out provides that the benefit for our otherwise qualifying export sales in 2005 and 2006 was limited to approximately 80% and 60%, respectively.. As a replacement for the loss of the ETI export incentive, the 2004 Act provides a deduction for income from qualified domestic production activities, which is being phased in from 2005 through 2010. This manufacturing deduction had no impact to our 2006 and 2005 tax rates,rate, and only a minor impact to our 2007 and 2008 tax rate.rates. The effect on future tax rates has not yet been quantified. Under the guidance of FASB Staff PositionNo. FAS 109-1, “Application of FASB Statement No. 109 to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004,” the tax deduction on qualified production activities will be treated as a special deduction as described in SFAS No. 109. As such, the special deduction will be reported in the period in which the deduction is claimed on our tax return.
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. The net decrease in valuation allowances in the rate reconciliation above includes a net reduction of state valuation allowances of $8.5 million and a net reduction of foreign valuation allowances of $2.2$8.2 million.
100
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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:
| | | | | | | | | | | | | | | | | |
| | | December 31, | | | December 31, | |
| | | 2007 | | 2006 | | | 2008 | | 2007 | |
| | | (Amounts in thousands) | | | (Amounts in thousands) | |
| |
| Deferred tax assets related to: | | | | | | | | | | | | | | | | |
| Retirement benefits | | $ | 54,931 | | | $ | 60,795 | | | $ | 56,119 | | | $ | 54,931 | |
| Net operating loss carryforwards | | | 30,708 | | | | 52,041 | | | | 31,305 | | | | 30,708 | |
| Compensation accruals | | | 50,505 | | | | 43,585 | | | | 67,386 | | | | 50,505 | |
| Inventories | | | 27,904 | | | | 29,620 | | | | 29,530 | | | | 27,904 | |
| Credit carryforwards | | | 18,077 | | | | 28,456 | | | | 3,502 | | | | 18,077 | |
| Warranty and accrued liabilities | | | 24,979 | | | | 26,176 | | | | 25,273 | | | | 24,979 | |
| Restructuring charge | | | 161 | | | | 177 | | | | 762 | | | | 161 | |
| Other | | | 6,225 | | | | 3,065 | | | | 10,588 | | | | 6,225 | |
| | | | | | | | | | | |
| Total deferred tax assets | | | 213,490 | | | | 243,915 | | | | 224,465 | | | | 213,490 | |
| Valuation allowances | | | (22,138 | ) | | | (33,733 | ) | | | (17,208 | ) | | | (22,138 | ) |
| | | | | | | | | | | |
| Net deferred tax assets | | | 191,352 | | | | 210,182 | | | | 207,257 | | | | 191,352 | |
| | | | | | | | | | | |
| Deferred tax liabilities related to: | | | | | | | | | | | | | | | | |
| Property, plant and equipment | | | (25,543 | ) | | | (34,945 | ) | | | (13,789 | ) | | | (25,543 | ) |
| Goodwill and intangibles | | | (61,990 | ) | | | (49,919 | ) | | | (65,396 | ) | | | (61,990 | ) |
| Unrealized foreign exchange gain | | | (28,435 | ) | | | (26,670 | ) | | | 3,825 | | | | (28,435 | ) |
| Foreign losses subject to recapture | | | (5 | ) | | | (9,802 | ) | | | — | | | | (5 | ) |
| Foreign equity investments | | | (6,459 | ) | | | (9,583 | ) | | | (4,501 | ) | | | (6,459 | ) |
| | | | | | | | | | | |
| Total deferred tax liabilities | | | (122,432 | ) | | | (130,919 | ) | | | (79,861 | ) | | | (122,432 | ) |
| | | | | | | | | | | |
| Deferred tax assets, net | | $ | 68,920 | | | $ | 79,263 | | | $ | 127,396 | | | $ | 68,920 | |
| | | | | | | | | | | |
104
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
We have approximately $182.3$175.5 million of U.S. and foreign net operating loss carryforwards at December 31, 2007.2008. Of this total, $58.5$55.8 million are state net operating losses. Net operating losses generated in the U.S., if unused, will begin to expire in 2007,2009, with the majority expiring in 2021. The majority of ournon-U.S. net operating losses carry forward without expiration. Additionally, we have approximately $16.6$2.1 million of foreign tax credit carryforwards at December 31, 2007,2008, expiring in 2010 through 2016 for which $0.3$2.1 million in valuation allowance reserves have been recorded.
Earnings (loss) before income taxes comprised:
| | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2007 | | | 2006 | | | 2005 | |
| | | (Amounts in thousands) | |
| |
| U.S | | $ | 91,348 | | | $ | 59,542 | | | $ | (32,978 | ) |
| Non-U.S | | | 268,720 | | | | 127,734 | | | | 124,980 | |
| | | | | | | | | | | | | |
| Total | | $ | 360,068 | | | $ | 187,276 | | | $ | 92,002 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2008 | | | 2007 | | | 2006 | |
| | | (Amounts in thousands) | |
| |
| U.S. | | $ | 129,323 | | | $ | 91,348 | | | $ | 59,542 | |
| Non-U.S. | | | 460,811 | | | | 268,720 | | | | 127,734 | |
| | | | | | | | | | | | | |
| Total | | $ | 590,134 | | | $ | 360,068 | | | $ | 187,276 | |
| | | | | | | | | | | | | |
On January 1, 2007, we adopted FIN No. 48, which addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FIN No. 48, we may 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
101
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
position and presumes that each uncertain tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information.
The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. FIN No. 48 also provides guidance on derecognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures.
The cumulative effect of adopting FIN No. 48 was an increase in tax reserves and a decrease of $29.8 million to opening retained earnings at January 1, 2007. Upon adoption, the amount of gross unrecognized tax benefits at January 1, 2007 was approximately $129 million. Of this amount $84.9 million, if recognized, would favorably impact our effective tax rate.
Interest and penalties related to income tax liabilities are included in income tax expense. The balance of accrued interest and penalties recorded on the balance sheet as part of our FIN No. 48 liability at January 1, 2007 was approximately $14 million.
105
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
A tabular reconciliation of the total gross amount of unrecognized tax benefits, excluding interest and penalties, at the beginning of the year and ending of the year is as follows (in millions):
| | | | | | | | | | | | | |
| Balance — January 1, 2007 | | $ | 114.9 | | |
| | | | 2008 | | 2007 | |
| | |
| Balance — January 1 | | | $ | 145.0 | | | $ | 114.9 | |
| Gross amount of increases and decreases in unrecognized tax benefits resulting from tax positions taken: | | | | | | | | | | | | |
| During a prior year | | | 13.7 | | | | 11.3 | | | | 13.7 | |
| During the current period | | | 12.6 | | | | 22.3 | | | | 12.6 | |
| Decreases in unrecognized tax benefits relating to: | | | | | | | | | | | | |
| Settlements with taxing authorities | | | (2.1 | ) | | | (0.9 | ) | | | (2.1 | ) |
| Lapse of the applicable statute of limitations | | | (1.6 | ) | | | (43.6 | ) | | | (1.6 | ) |
| Increases in unrecognized tax benefits relating to foreign currency translation adjustments | | | 7.5 | | |
| (Decreases) increases in unrecognized tax benefits relating to foreign currency translation adjustments | | | | (3.3 | ) | | | 7.5 | |
| | | | | | | | | |
| Balance — December 31, 2007 | | $ | 145.0 | | |
| Balance — December 31 | | | $ | 130.8 | | | $ | 145.0 | |
| | | | | | | | | |
The amount of gross unrecognized tax benefits at December 31, 20072008 was $163.4$151.1 million, which includes $18.4$20.3 million of accrued interest and penalties. Of this amount $105.3$93.3 million, if recognized, would favorably impact our effective tax rate. Interest and penalties related to income tax liabilities are included in income tax expense. The total amount of interest and penalties recognized in the statement of income for the yearyears ended December 31, 2008 and 2007 was $1.9 million and $4.4 million.million, respectively.
With limited exception, we are no longer subject to U.S. federal, state and local income tax audits for years through 20022004 ornon-U.S. income tax audits for years through 2001.2002. We are currently under examination for various years in the U.S., Germany, Italy, Canada, Venezuela and Argentina.
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, including the previously unrecognized tax benefit associated with the one-time repatriation of foreign profits in 2004.authorities. It is also reasonably possible that we will have the statute of limitations close in various taxing jurisdictions within the next 12 months. As such, we estimate we could record a reduction in our tax expense of approximately $17 millionup to $32$9 million within the next 12 months.
| |
17.18. | BUSINESS SEGMENT INFORMATION |
We are principally engaged in the worldwide design, manufacture, distribution and service of industrial flow management equipment. We provide pumps, valves and mechanical seals primarily for the oil and gas industry, chemical, power, water and other industries requiring flow management products.
102
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
We have the following three divisions, each of which constitutes a business segment:
| | |
| | • | Flowserve Pump Division; |
| |
| | • | Flow Control Division; and |
| |
| | • | Flow Solutions Division. |
Each division manufactures different products and is defined by the type of products and services provided. Each division has a President, who reports directly to our Chief Executive Officer, and a Division Vice President — Finance, who reports directly to our Chief Accounting Officer. For decision-making purposes, our Chief Executive Officer and other members of senior executive management use financial information generated and reported at the division level. Our corporate headquarters does not constitute a separate division or business segment.
We evaluate segment performance and allocate resources based on each segment’s operating income. Amounts classified as “All Other” include the corporate headquarters costs and other minor entities that do not constitute
106
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
separate segments. Intersegment sales and transfers are recorded at cost plus a profit margin, with the margin on such sales eliminated in consolidation.
The following is a summary of the financial information of the reportable segments reconciled to the amounts reported in the consolidated financial statements.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Subtotal —
| | | | | | | | | | | | | Subtotal —
| | | | | |
| | | Flowserve
| | Flow
| | Flow
| | Reportable
| | | | Consolidated
| | | Flowserve
| | Flow
| | Flow
| | Reportable
| | | | Consolidated
| |
| | | Pump | | Control | | Solutions | | Segments | | All Other | | Total | | | Pump | | Control | | Solutions | | Segments | | All Other(1) | | Total | |
| | | (Amounts in thousands) | | | (Amounts in thousands) | |
| |
Year Ended December 31, 2007: | | | | | | | | | | | | | | | | | | | | | | | | | |
Year Ended December 31, 2008: | | | | | | | | | | | | | | | | | | | | | | | | | |
| Sales to external customers | | $ | 2,093,856 | | | $ | 1,156,738 | | | $ | 506,053 | | | $ | 3,756,647 | | | $ | 6,047 | | | $ | 3,762,694 | | | $ | 2,512,826 | | | $ | 1,375,187 | | | $ | 580,069 | | | $ | 4,468,082 | | | $ | 5,391 | | | $ | 4,473,473 | |
| Intersegment sales | | | 1,510 | | | | 6,431 | | | | 58,447 | | | | 66,388 | | | | (66,388 | ) | | | — | | | | 1,960 | | | | 6,509 | | | | 73,610 | | | | 82,079 | | | | (82,079 | ) | | | — | |
| Segment operating income | | | 274,196 | | | | 163,654 | | | | 111,532 | | | | 549,382 | | | | (139,466 | ) | | | 409,916 | | | | 390,985 | | | | 218,433 | | | | 127,252 | | | | 736,670 | | | | (123,798 | ) | | | 612,872 | |
| Depreciation and amortization | | | 33,709 | | | | 25,789 | | | | 7,825 | | | | 67,323 | | | | 10,388 | | | | 77,711 | | | | 37,826 | | | | 26,485 | | | | 8,533 | | | | 72,844 | | | | 8,598 | | | | 81,442 | |
Identifiable assets(1) | | | 1,792,864 | | | | 988,416 | | | | 292,439 | | | | 3,073,719 | | | | 446,702 | | | | 3,520,421 | | | | 2,039,719 | | | | 1,049,974 | | | | 318,953 | | | | 3,408,646 | | | | 615,048 | | | | 4,023,694 | |
| Capital expenditures | | | 48,284 | | | | 19,092 | | | | 11,168 | | | | 78,544 | | | | 10,431 | | | | 88,975 | | | | 55,319 | | | | 41,195 | | | | 16,665 | | | | 113,179 | | | | 13,753 | | | | 126,932 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | Subtotal —
| | | | | | | |
| | | Flowserve
| | | Flow
| | | Flow
| | | Reportable
| | | | | | Consolidated
| |
| | | Pump | | | Control | | | Solutions | | | Segments | | | All Other(1) | | | Total | |
| | | (Amounts in thousands) | |
| |
Year Ended December 31, 2007: | | | | | | | | | | | | | | | | | | | | | | | | |
| Sales to external customers | | $ | 2,093,856 | | | $ | 1,156,738 | | | $ | 506,053 | | | $ | 3,756,647 | | | $ | 6,047 | | | $ | 3,762,694 | |
| Intersegment sales | | | 1,510 | | | | 6,431 | | | | 58,447 | | | | 66,388 | | | | (66,388 | ) | | | — | |
| Segment operating income | | | 274,196 | | | | 163,654 | | | | 111,532 | | | | 549,382 | | | | (139,466 | ) | | | 409,916 | |
| Depreciation and amortization | | | 33,709 | | | | 25,789 | | | | 7,825 | | | | 67,323 | | | | 10,388 | | | | 77,711 | |
| Identifiable assets | | | 1,792,864 | | | | 988,416 | | | | 292,439 | | | | 3,073,719 | | | | 446,702 | | | | 3,520,421 | |
| Capital expenditures | | | 48,284 | | | | 19,092 | | | | 11,168 | | | | 78,544 | | | | 10,431 | | | | 88,975 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | Subtotal —
| | | | | | | |
| | | Flowserve
| | | Flow
| | | Flow
| | | Reportable
| | | | | | Consolidated
| |
| | | Pump | | | Control | | | Solutions | | | Segments | | | All Other | | | Total | |
| | | (Amounts in thousands) | |
| |
Year Ended December 31, 2006: | | | | | | | | | | | | | | | | | | | | | | | | |
| Sales to external customers | | $ | 1,613,611 | | | $ | 991,862 | | | $ | 450,502 | | | $ | 3,055,975 | | | $ | 5,088 | | | $ | 3,061,063 | |
| Intersegment sales | | | 4,113 | | | | 2,972 | | | | 46,118 | | | | 53,203 | | | | (53,203 | ) | | | — | |
| Segment operating income | | | 172,724 | | | | 115,869 | | | | 98,525 | | | | 387,118 | | | | (147,499 | ) | | | 239,619 | |
| Depreciation and amortization | | | 31,269 | | | | 25,920 | | | | 6,514 | | | | 63,703 | | | | 7,293 | | | | 70,996 | |
| Identifiable assets | | | 1,508,472 | | | | 925,673 | | | | 252,504 | | | | 2,686,649 | | | | 182,586 | | | | 2,869,235 | |
| Capital expenditures | | | 29,731 | | | | 18,251 | | | | 15,389 | | | | 63,371 | | | | 10,157 | | | | 73,528 | |
| | |
| (1) | | The increase in identifiable assets for “All Other” in 2008 and 2007 is primarily a result of increased cash balances. |
103107
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | Subtotal —
| | | | | | | |
| | | Flowserve
| | | Flow
| | | Flow
| | | Reportable
| | | | | | Consolidated
| |
| | | Pump | | | Control | | | Solutions | | | Segments | | | All Other | | | Total | |
| | | (Amounts in thousands) | |
| |
Year Ended December 31, 2005: | | | | | | | | | | | | | | | | | | | | | | | | |
| Sales to external customers | | $ | 1,394,545 | | | $ | 889,608 | | | $ | 406,093 | | | $ | 2,690,246 | | | $ | 5,031 | | | $ | 2,695,277 | |
| Intersegment sales | | | 3,901 | | | | 4,681 | | | | 37,548 | | | | 46,130 | | | | (46,130 | ) | | | — | |
| Segment operating income | | | 149,823 | | | | 92,057 | | | | 87,512 | | | | 329,392 | | | | (130,569 | ) | | | 198,823 | |
| Depreciation and amortization | | | 32,597 | | | | 25,497 | | | | 6,053 | | | | 64,147 | | | | 5,741 | | | | 69,888 | |
| Identifiable assets | | | 1,324,826 | | | | 880,714 | | | | 208,763 | | | | 2,414,303 | | | | 199,361 | | | | 2,613,664 | |
| Capital expenditures | | | 18,012 | | | | 11,418 | | | | 7,153 | | | | 36,583 | | | | 12,688 | | | | 49,271 | |
| | |
(1) | | The increase in “All Other” in 2007 primarily represents increased cash balances in accounts held by our corporate headquarters. |
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 non-current. Sales and long-lived assets by geographic area are as follows:
| | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2008 | |
| | | | | | | | | Long-Lived
| | | | |
| | | Sales | | | Percentage | | | Assets | | | Percentage | |
| | | (Amounts in thousands) | |
| |
| United States | | $ | 1,547,448 | | | | 34.6 | % | | $ | 1,062,577 | | | | 64.1 | % |
| Europe(1) | | | 2,119,196 | | | | 47.4 | % | | | 446,153 | | | | 26.9 | % |
| Other(2) | | | 806,829 | | | | 18.0 | % | | | 149,978 | | | | 9.0 | % |
| | | | | | | | | | | | | | | | | |
| Consolidated total | | | 4,473,473 | | | | 100.0 | % | | | 1,658,708 | | | | 100.0 | % |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2007 | |
| | | | | | | | | Long-Lived
| | | | |
| | | Sales | | | Percentage | | | Assets | | | Percentage | |
| | | (Amounts in thousands) | |
| |
| United States | | $ | 1,381,981 | | | | 36.7 | % | | $ | 1,020,708 | | | | 63.4 | % |
| Europe(1) | | | 1,767,418 | | | | 47.0 | % | | | 449,343 | | | | 27.9 | % |
| Other(2) | | | 613,295 | | | | 16.3 | % | | | 139,783 | | | | 8.7 | % |
| | | | | | | | | | | | | | | | | |
| Consolidated total | | $ | 3,762,694 | | | | 100.0 | % | | $ | 1,609,834 | | | | 100.0 | % |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2006 | |
| | | | | | | | | Long-Lived
| | | | |
| | | Sales | | | Percentage | | | Assets | | | Percentage | |
| | | (Amounts in thousands) | |
| |
| United States | | $ | 1,213,636 | | | | 39.6 | % | | $ | 1,006,965 | | | | 65.4 | % |
| Europe(1) | | | 1,354,212 | | | | 44.3 | % | | | 423,570 | | | | 27.5 | % |
| Other(2) | | | 493,215 | | | | 16.1 | % | | | 110,088 | | | | 7.1 | % |
| | | | | | | | | | | | | | | | | |
| Consolidated total | | $ | 3,061,063 | | | | 100.0 | % | | $ | 1,540,623 | | | | 100.0 | % |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2005 | |
| | | | | | | | | Long-Lived
| | | | |
| | | Sales | | | Percentage | | | Assets | | | Percentage | |
| | | (Amounts in thousands) | |
| |
| United States | | $ | 1,076,043 | | | | 39.9 | % | | $ | 999,782 | | | | 68.0 | % |
| Europe(1) | | | 1,183,139 | | | | 43.9 | % | | | 383,349 | | | | 26.1 | % |
| Other(2) | | | 436,095 | | | | 16.2 | % | | | 86,947 | | | | 5.9 | % |
| | | | | | | | | | | | | | | | | |
| Consolidated total | | $ | 2,695,277 | | | | 100.0 | % | | $ | 1,470,078 | | | | 100.0 | % |
| | | | | | | | | | | | | | | | | |
| | |
| (1) | | In 2008, 2007 and 2006, Germany accounted for approximately 10% of consolidated sales. No individual country within this group represents 10% or more of consolidated sales for 2005, nor 10% or more of consolidated long-lived assets for any period presented. |
| |
| (2) | | Includes“Other” includes Canada, Latin America and Asia Pacific. No individual geographic segment within this group represents 10% or more of consolidated totals.totals for any period presented. |
104
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Net sales to international customers, including export sales from the United States, represented 66%69%, 67%66% and 65%67% of total sales in 2008, 2007 2006 and 2005,2006, respectively.
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.
108
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
18.19. | ACCUMULATED OTHER COMPREHENSIVE LOSS |
The following presents the components of accumulated other comprehensive loss, net of related tax effects:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | | Year Ended December 31, | |
| | | 2007(1) | | 2006(1)(2) | | 2005 | | | 2008 | | 2007 | | 2006 | |
| | | (Amounts in thousands) | | | (Amounts in thousands) | |
| |
Foreign currency translation adjustments | | $ | 50,368 | | | $ | 1,690 | | | $ | (37,230 | ) | | $ | (75,485 | ) | | $ | 50,368 | | | $ | 1,690 | |
Pension and other postretirement effects | | | (69,100 | ) | | | (70,097 | ) | | | (93,983 | ) | | | (129,077 | ) | | | (69,100 | ) | | | (70,097 | ) |
| Adoption of SFAS No. 158 | | | — | | | | (23,186 | ) | | | — | | | | — | | | | — | | | | (23,186 | ) |
| Cash flow hedging activity | | | (2,652 | ) | | | 1,253 | | | | 556 | | | | (6,758 | ) | | | (2,652 | ) | | | 1,253 | |
| | | | | | | | | | | | | | | |
| Accumulated other comprehensive loss | | $ | (21,384 | ) | | $ | (90,340 | ) | | $ | (130,657 | ) | | $ | (211,320 | ) | | $ | (21,384 | ) | | $ | (90,340 | ) |
| | | | | | | | | | | | | | | |
| | |
| (1) | | The decrease in foreign currency translation adjustments in 2008 primarily represents a strengthening of the U.S. dollar exchange rate versus the Euro and the British pound at December 31, 2008 as compared with December 31, 2007. The increase in foreign currency translation adjustments in 2007 and 2006 is due primarily to the weakening of the U.S. dollar exchange rate versus the Euro. |
| |
| (2) | | The decrease in pension and other postretirement effects in 2006 is2008 as compared with 2007 primarily the result of an increased discount rate.reflects actuarial net losses resulting from returns on plan assets that were lower than anticipated. |
The following tables present a summary of other comprehensive (expense) income (expense) for the years ended December 31, 2008, 2007 2006 and 2005:2006:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2007 | | | Year Ended December 31, 2008 | |
| | | Before-Tax
| | | | After-Tax
| | | Before-Tax
| | | | After-Tax
| |
| | | Amount | | Income Tax | | Amount | | | Amount | | Income Tax | | Amount | |
| | | (Amounts in thousands) | | | (Amounts in thousands) | |
| |
| Foreign currency translation adjustments | | $ | 52,651 | | | $ | (3,973 | ) | | $ | 48,678 | | | | (127,687 | ) | | | 1,834 | | | $ | (125,853 | ) |
| Pension and other postretirement effects | | | 35,033 | | | | 10,850 | | | | 24,183 | | | | (97,731 | ) | | | 37,754 | | | | (59,977 | ) |
| Cash flow hedging activity | | | (6,102 | ) | | | 2,197 | | | | (3,905 | ) | | | (6,416 | ) | | | 2,310 | | | | (4,106 | ) |
| | | | | | | | | | | | | | | |
| Other comprehensive income (expense) | | $ | 81,582 | | | $ | 9,074 | | | $ | 68,956 | | |
| Other comprehensive (expense) income | | | $ | (231,834 | ) | | $ | 41,898 | | | $ | (189,936 | ) |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | Year Ended December 31, 2007 | |
| | | Before-Tax
| | | | | | After-Tax
| |
| | | Amount | | | Income Tax | | | Amount | |
| | | (Amounts in thousands) | |
| |
| Foreign currency translation adjustments | | $ | 52,651 | | | $ | (3,973 | ) | | $ | 48,678 | |
| Pension and other postretirement effects | | | 35,033 | | | | 10,850 | | | | 24,183 | |
| Cash flow hedging activity | | | (6,102 | ) | | | 2,197 | | | | (3,905 | ) |
| | | | | | | | | | | | | |
| Other comprehensive income | | $ | 81,582 | | | $ | 9,074 | | | $ | 68,956 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | Year Ended December 31, 2006 | |
| | | Before-Tax
| | | | | | After-Tax
| |
| | | Amount | | | Income Tax | | | Amount | |
| | | (Amounts in thousands) | |
| |
| Foreign currency translation adjustments | | $ | 45,564 | | | $ | (6,644 | ) | | $ | 38,920 | |
| Pension and other postretirement effects | | | 32,571 | | | | (8,685 | ) | | | 23,886 | |
| Cash flow hedging activity | | | 994 | | | | (297 | ) | | | 697 | |
| | | | | | | | | | | | | |
| Other comprehensive income (expense) | | $ | 79,129 | | | $ | (15,626 | ) | | $ | 63,503 | |
| | | | | | | | | | | | | |
105109
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | | | | | |
| | | Year Ended December 31, 2005 | |
| | | Before-Tax
| | | | | | After-Tax
| |
| | | Amount | | | Income Tax | | | Amount | |
| | | (Amounts in thousands) | |
| |
| Foreign currency translation adjustments | | $ | (37,782 | ) | | $ | 2,936 | | | $ | (34,846 | ) |
| Pension and other postretirement effects | | | (40,097 | ) | | | 8,216 | | | | (31,881 | ) |
| Cash flow hedging activity | | | 4,923 | | | | (1,939 | ) | | | 2,984 | |
| | | | | | | | | | | | | |
| Other comprehensive income (expense) | | $ | (72,956 | ) | | $ | 9,213 | | | $ | (63,743 | ) |
| | | | | | | | | | | | | |
| |
19.20. | QUARTERLY FINANCIAL DATA (UNAUDITED) |
The following presents a summary of the unaudited quarterly data for 20072008 and 20062007 (amounts in millions except per share data):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2007 | | | 2008 | |
Quarter | | 4th | | 3rd | | 2nd | | 1st | | | 4th | | 3rd | | 2nd | | 1st | |
| |
| Sales | | $ | 1,109.4 | | | $ | 919.2 | | | $ | 930.7 | | | $ | 803.4 | | | $ | 1,169.0 | | | $ | 1,153.6 | | | $ | 1,157.6 | | | $ | 993.3 | |
| Gross profit | | | 366.2 | | | | 313.6 | | | | 302.4 | | | | 265.5 | | | | 411.6 | | | | 404.9 | | | | 418.0 | | | | 345.8 | |
| Earnings before income taxes | | | 128.1 | | | | 95.0 | | | | 84.0 | | | | 53.0 | | | | 159.9 | | | | 144.0 | | | | 161.0 | | | | 125.2 | |
| Net earnings | | | 95.9 | | | | 63.1 | | | | 63.2 | | | | 33.6 | | | | 114.4 | | | | 117.0 | | | | 122.9 | | | | 88.1 | |
| Earnings per share: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Basic | | $ | 1.70 | | | $ | 1.12 | | | $ | 1.12 | | | $ | 0.60 | | | $ | 2.05 | | | $ | 2.06 | | | $ | 2.16 | | | $ | 1.55 | |
| Diluted | | $ | 1.67 | | | $ | 1.10 | | | $ | 1.11 | | | $ | 0.59 | | | | 2.03 | | | | 2.04 | | | | 2.13 | | | | 1.53 | |
| | | | | | | | | | | | | | | | | |
| | | 2006 | |
Quarter | | 4th | | | 3rd | | | 2nd | | | 1st | |
| |
| Sales | | $ | 883.5 | | | $ | 770.8 | | | $ | 752.9 | | | $ | 653.9 | |
| Gross profit | | | 286.9 | | | | 249.8 | | | | 252.6 | | | | 218.0 | |
| Earnings before income taxes | | | 51.7 | | | | 45.3 | | | | 62.6 | | | | 27.7 | |
| Income from continuing operations | | | 33.3 | | | | 28.5 | | | | 33.6 | | | | 18.6 | |
| Gain from discontinued operations | | | 0.2 | | | | 0.8 | | | | — | | | | — | |
| Net earnings | | | 33.5 | | | | 29.3 | | | | 33.6 | | | | 18.6 | |
| Earnings per share (basic): | | | | | | | | | | | | | | | | |
| Continuing operations | | $ | 0.59 | | | $ | 0.51 | | | $ | 0.60 | | | $ | 0.34 | |
| Discontinued operations | | | — | | | | 0.02 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | |
| Net earnings | | $ | 0.59 | | | $ | 0.53 | | | $ | 0.60 | | | $ | 0.34 | |
| | | | | | | | | | | | | | | | | |
| Earnings per share (diluted): | | | | | | | | | | | | | | | | |
| Continuing operations | | $ | 0.58 | | | $ | 0.49 | | | $ | 0.58 | | | $ | 0.32 | |
| Discontinued operations | | | — | | | | 0.02 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | |
| Net earnings | | $ | 0.58 | | | $ | 0.51 | | | $ | 0.58 | | | $ | 0.32 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | 2007 | |
Quarter | | 4th | | | 3rd | | | 2nd | | | 1st | |
| |
| Sales | | $ | 1,109.4 | | | $ | 919.2 | | | $ | 930.7 | | | $ | 803.4 | |
| Gross profit | | | 366.2 | | | | 313.6 | | | | 302.4 | | | | 265.5 | |
| Earnings before income taxes | | | 128.1 | | | | 95.0 | | | | 84.0 | | | | 53.0 | |
| Net earnings | | | 95.9 | | | | 63.1 | | | | 63.2 | | | | 33.6 | |
| Earnings per share: | | | | | | | | | | | | | | | | |
| Basic | | $ | 1.70 | | | $ | 1.12 | | | $ | 1.12 | | | $ | 0.60 | |
| Diluted | | | 1.67 | | | | 1.10 | | | | 1.11 | | | | 0.59 | |
106
FLOWSERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)We had no significant fourth quarter adjustments in 2008.
The significant fourth quarter adjustments to 2007 net earnings were to record i) net gains of approximately $9 million (pretax) from certain legal matters and ii) reversal of deferred tax valuation allowances of approximately $8 million.
We had no significant fourth quarter adjustments in 2006.
Updates to legal matters in existence at December 31, 20072008 and new legal matters that have arisen since December 31, 20072008 are discussed in Note 13.14.
On February 26, 2008, the Board of Directors authorized a program to repurchase up to $300.0 million of23, 2009, our outstanding common stock over an unspecified time period. The program is expected to commence by the second quarter of 2008.
On February 26, 2008, the Board of Directors authorized an increase in the payment of quarterly cash dividenddividends on our common stock from $0.15$0.25 per share to $0.25$0.27 per share payable quarterly beginning on April 9, 2008.8, 2009.
107110
| |
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.DISCLOSURE |
None.
| |
| ITEM 9A. | CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures
Our disclosure controls and procedures (as defined inRule 13a-15(e) under the Securities Exchange Act of 1934 as amended (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 SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
In connection with the preparation of this Annual Report onForm 10-K, our management, under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2007.2008. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of December 31, 2007.2008.
Management’s Report on Internal Control Over Financial Reporting
Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined inRules 13a-15(f) and15d-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 GAAP. Internal control over financial reporting includes policies and procedures thatthat: (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;our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures of the Company are being made only in accordance with authorizations of our management and directors of the Company;directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’sour 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 Chief Executive Officer and Chief Financial Officer, our management conducted an assessment of our internal control over financial reporting as of December 31, 2007,2008, based on the criteria established inInternal Control — Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission .Commission. Based on this assessment, our management has concluded that as of December 31, 2007,2008, our internal control over financial reporting was effective.
The effectiveness of our internal control over financial reporting as of December 31, 2007,2008, has been audited by PricewaterhouseCoopers LLP, our independent registered public accounting firm, as stated in their report, which is included herein.
111
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended December 31, 20072008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
108
| |
| ITEM 9B. | OTHER INFORMATION.INFORMATION |
ChristopherOn February 23, 2009, we and Mark A. Bartlett, a current member of our Board whose term expires atBlinn, Senior Vice President, Chief Financial Officer and Latin America Operations, entered into an Amendment Number Two to the 2010 annual meeting, has notified us that he will retire from our Board of Directors effective asMark Blinn Employment Agreement (the “Amendment”). The Amendment amends the terms of the dateEmployment Agreement between us and Mr. Blinn, dated May 7, 2007, as amended by Amendment Number One, dated November 19, 2008 (as amended, the “Employment Agreement”). The terms of the 2008 annual meeting.Amendment extend the term of the Employment Agreement to April 1, 2012, which will permit us a longer transition period with Mr. Blinn, if necessary, following the end of Lewis M. Kling’s, our current president and chief executive officer, employment by us. The terms of the Amendment also extend the time period during which Mr. Blinn may resign his employment with us for “good reason” (as defined in the Employment Agreement) under certain circumstances from 30 days to the end of the Employment Agreement’s term.
The foregoing description of the Amendment is qualified by reference to the full text of the Amendment, which is filed as an exhibit to this Annual Report onForm 10-K, and is incorporated herein by reference.
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 2009 annual meeting of shareholders to be held on May 14, 2009. The Proxy Statement will be filed with the SEC no later than April 30, 2008.2009.
| |
| ITEM 11. | EXECUTIVE COMPENSATION. |
The information required in this Item 11 is incorporated by reference to our definitive Proxy Statement relating to our 2009 annual meeting of shareholders to be held on May 14, 2009. The Proxy Statement will be filed with the SEC no later than April 30, 2008.2009.
| |
| 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 2009 annual meeting of shareholders to be held on May 14, 2009. The Proxy Statement will be filed with the SEC no later than April 30, 2008.2009.
| |
| 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 2009 annual meeting of shareholders to be held on May 14, 2009. The Proxy Statement will be filed with the SEC no later than April 30, 2008.2009.
| |
| ITEM 14. | PRINCIPAL ACCOUNTANTACCOUNTING FEES AND SERVICES. |
The information required in this Item 14 is incorporated by reference to our definitive Proxy Statement relating to our 2009 annual meeting of shareholders to be held on May 14, 2009. The Proxy Statement will be filed with the SEC no later than April 30, 2008.2009.
112
PART IV
| |
| ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES. |
(a) Documents filed as a part of this Annual Report onForm 10-K:Report:
1. Consolidated Financial Statements
The following consolidated financial statements and notes thereto are filed as part of this Annual Report onForm 10-K:
Report of Independent Registered Public Accounting Firm
Flowserve Corporation Consolidated Financial Statements:
Consolidated Balance Sheets at December 31, 20062007 and 20072008
For each of the three years in the period ended December 31, 2007:2008:
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income (Loss)
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 | |
109
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
The following exhibits are either filed herewith or incorporated by referenceSee Index to the designated document previously filed with the SEC. The Company will furnish copies of exhibits for a reasonable fee (covering the expense of furnishing copies) upon request. Stockholders may request exhibits copies by contacting:
Flowserve Corporation
Attn: Investor Relations
5215 N. O’Connor Boulevard, Suite 2300
Irving, Texas 75039
(972) 443-6500Exhibits to this Annual Report.
110
| | | | | |
Exhibit
| | |
No. | | Description |
| |
| | 3 | .1 | | Restated Certificate of Incorporation of Flowserve Corporation, filed as Exhibit 3.(i) to Flowserve Corporation’s Current Report onForm 8-K/A, dated August 16, 2006. |
| | 3 | .2 | | Amended and Restated By-Laws of Flowserve Corporation, effective as of January 1, 2008 and filed as Exhibit 2.1 to Flowserve Corporation’s Current Report onForm 8-K, dated December 19, 2007. |
| | 4 | .1 | | Lease agreement and indenture, dated as of January 1, 1995 and bond purchase agreement, dated January 27, 1995, in connection with an 8% Taxable Industrial Development Revenue Bond, City of Albuquerque, New Mexico. (Relates to a class of indebtedness that does not exceed 10% of the total assets of the Company. The Company will furnish a copy of the documents to the Commission upon request.) |
| | 10 | .1 | | Credit Agreement, dated as of August 12, 2005, among the Company, the lenders referred therein, and Bank of America, N.A., as swingline lender, administrative agent and collateral agent, filed as Exhibit 10.1 to the Company’s Current Report onForm 8-K, dated as of August 17, 2005. |
| | 10 | .2 | | Amendment and Waiver, dated December 20, 2005 and effective December 23, 2005, to that certain Credit Agreement, dated as of August 12, 2005, among the Company, the financial institutions from time to time party thereto, and Bank of America, N.A., as Swingline Lender, Administrative Agent and Collateral Agent, filed as Exhibit 10.1 to the Company’s Current Report onForm 8-K, dated as of December 30, 2005. |
| | 10 | .3 | | Second Amendment dated as of May 8, 2006 and effective as of May 16, 2006 to that certain Credit Agreement dated as of August 12, 2005, filed as Exhibit 10.1 to the Company’s Current Report onForm 8-K, dated as of May 19, 2006. |
| | 10 | .4 | | Third Amendment to Credit Agreement and First Amendment to Pledge Agreement dated as of August 7, 2007, among Flowserve Corporation, the lenders named therein and Bank of America, N.A., as administrative agent, swingline lender and collateral agent, filed as Exhibit 10.6 to Flowserve Corporation’s Quarterly Report onForm 10-Q for the Quarter ended June 30, 2007. |
| | 10 | .5 | | Flowserve Corporation Director Cash Deferral Plan, as amended and restated in connection with the bifurcation of the Flowserve Corporation Director Deferral Plan, effective October 1, 2000, filed as Exhibit 10.3 to the Company’s Annual Report onForm 10-K for the year ended December 31, 2000.* |
| | 10 | .6 | | Amendment to the Flowserve Corporation Amended and Restated Director Cash Deferral Plan, dated December 14, 2005, filed as Exhibit 10.67 to the Company’s Annual Report onForm 10-K for the year ended December 31, 2004.* |
| | 10 | .7 | | Flowserve Corporation Director Stock Deferral Plan, as amended and restated in connection with the bifurcation of the Flowserve Corporation Director Deferral Plan, effective October 1, 2000, filed as Exhibit 10.3 to the Company’s Annual Report onForm 10-K for the year ended December 31, 2000.* |
| | 10 | .8 | | First Master Benefit Trust Agreement, dated October 1, 1987, filed as Exhibit 10.24 to the Company’s Annual Report onForm 10-K for the year ended December 31, 1987.* |
| | 10 | .9 | | Amendment No. 1 to the First Master Benefit Trust Agreement, dated October 1, 1987, filed as Exhibit 10.24 to the Company’s Annual Report onForm 10-K for the year ended December 31, 1993.* |
| | 10 | .10 | | Amendment No. 2 to First Master Benefit Trust Agreement, dated October 1, 1987, filed as Exhibit 10.25 to the Company’s Annual Report onForm 10-K for the year ended December 31, 1994.* |
| | 10 | .11 | | Amendment to Master Benefit Trust Agreement, filed as Exhibit 10.45 to the Company’s Annual Report onForm 10-K for the year ended December 31, 2000.* |
| | 10 | .12 | | Amendment to The Duriron Company, Inc. First Master Benefit Trust Agreement, dated December 14, 2005, filed as Exhibit 10.66 to the Company’s Annual Report onForm 10-K for the year ended December 31, 2004.* |
| | 10 | .13 | | Second Master Benefit Trust Agreement, dated October 1, 1987, filed as Exhibit 10.12 to the Company’s Annual Report onForm 10-K for the year ended December 31, 1987.* |
| | 10 | .14 | | First Amendment to Second Master Benefit Trust Agreement, dated December 22, 1994, filed as Exhibit 10.26 to the Company’s Annual Report onForm 10-K for the year ended December 31, 1994.* |
| | 10 | .15 | | Flowserve Corporation Long-Term Cash Incentive Plan, as amended and restated in connection with the bifurcation of the Flowserve Corporation Long-Term Incentive Plan, effective October 1, 2000, filed as Exhibit 10.10 to the Company’s Annual Report onForm 10-K for the year ended December 31, 2000.* |
111
| | | | | |
Exhibit
| | |
No. | | Description |
| |
| | 10 | .16 | | Flowserve Corporation Long-Term Stock Incentive Plan, as amended and restated in connection with the bifurcation of the Flowserve Corporation Long-Term Incentive Plan, effective October 1, 2000, filed as Exhibit 10.10 to the Company’s Annual Report onForm 10-K for the year ended December 31, 2000.* |
| | 10 | .17 | | 2007 Flowserve Corporation Long-Term Stock Incentive Plan, effective January 1, 2007, filed as Appendix A to the Company’s Proxy Statement, dated April 13, 2007.* |
| | 10 | .18 | | 2007 Flowserve Corporation Annual Incentive Plan, effective January 1, 2007, filed as Appendix B to the Company’s Proxy Statement, dated April 13, 2007.* |
| | 10 | .19 | | Flowserve Corporation Deferred Compensation Plan, filed as Exhibit 10.23 to the Company’s Annual Report onForm 10-K for the year ended December 31, 2000.* |
| | 10 | .20 | | Amendment No. 1 to the Flowserve Corporation Deferred Compensation Plan, as amended and restated, effective June 1, 2000, filed as Exhibit 10.50 to the Company’s Annual Report onForm 10-K for the year ended December 31, 2002.* |
| | 10 | .21 | | Amendment to the Flowserve Corporation Deferred Compensation Plan, dated December 14, 2005, filed as Exhibit 10.70 to the Company’s Annual Report onForm 10-K for the year ended December 31, 2004.* |
| | 10 | .22 | | Amendment No. 3 to the Flowserve Corporation Deferred Compensation Plan, as amended and restated effective June 1, 2000 (filed herewith). |
| | 10 | .23 | | The Duriron Company, Inc. 1997 Stock Option Plan, attached as Exhibit A to the Company’s Proxy Statement, filed on March 17, 1997.* |
| | 10 | .24 | | First Amendment to the Flowserve Corporation 1997 Stock Option Plan, filed as Exhibit 10.28 to the Company’s Quarterly Report onForm 10-Q for the quarter ended June 30, 1998* |
| | 10 | .25 | | Amendment No. 2 to the Flowserve Corporation 1997 Stock Option Plan, filed as Exhibit 10.29 to the Company’s Annual Report onForm 10-K for the year ended December 31, 1999.* |
| | 10 | .26 | | Amendment No. 3 to the Flowserve Corporation 1997 Stock Option Plan, filed as Exhibit 10.29 to the Company’s Annual Report onForm 10-K for the year ended December 31, 2000.* |
| | 10 | .27 | | Flowserve Corporation 1998 Restricted Stock Plan, attached as Appendix A to the Company’s 1999 Proxy Statement, filed on April 9, 1998.* |
| | 10 | .28 | | Amendment No. 1 to the Flowserve Corporation 1998 Restricted Stock Plan, filed as Exhibit 10 to the Company’s Quarterly Report onForm 10-Q for the quarter ended March 31, 1999.* |
| | 10 | .29 | | Amendment No. 2 to the Flowserve Corporation 1998 Restricted Stock Plan, filed as Exhibit 10.1 to the Company’s Quarterly Report onForm 10-Q for the quarter ended June 30, 1999.* |
| | 10 | .30 | | Amendment No. 3 to the Flowserve Corporation 1998 Restricted Stock Plan, filed as Exhibit 10.37 to the Company’s Annual Report onForm 10-K for the year ended December 31, 2000.* |
| | 10 | .31 | | Amendment No. 4 to the Flowserve Corporation 1998 Restricted Stock Plan, filed as Exhibit 10.1 to the Company’s Quarterly Report onForm 10-Q for the quarter ended June 30, 2001.* |
| | 10 | .32 | | Amendment No. 5 to the Flowserve Corporation 1998 Restricted Stock Plan, filed as Exhibit 4.16 to the Company’s Registration Statement onForm S-8, filed September 29, 2006.* |
| | 10 | .33 | | Flowserve Corporation 1998 Restricted Stock Dividend Plan, effective October 1, 2000, filed as Exhibit 10.38 to the Company’s Annual Report onForm 10-K for the year ended December 31, 2000. |
| | 10 | .34 | | Flowserve Corporation 1999 Stock Option Plan, attached as Exhibit A to the Company’s 1999 Proxy Statement, filed on March 15, 1999.* |
| | 10 | .35 | | Amendment No. 1 to the Flowserve Corporation 1999 Stock Option Plan, filed as Exhibit 10.31 to the Company’s Annual Report onForm 10-K for the year ended December 31, 1999.* |
| | 10 | .36 | | Amendment No. 2 to the Flowserve Corporation 1999 Stock Option Plan, filed as Exhibit 10.32 to the Company’s Annual Report onForm 10-K for the year ended December 31, 2000.* |
| | 10 | .37 | | Flowserve Corporation Officer Severance Plan, amended and restated effective January 1, 2007, filed as Exhibit 10.1 to the Company’s Quarterly Report onForm 10-K for the Quarter ended March 31, 2007.* |
| | 10 | .38 | | Flowserve Corporation Executive Officer Change In Control Severance Plan, amended and restated effective November 12, 2007 (filed herewith).* |
112
| | | | | |
Exhibit
| | |
No. | | Description |
| |
| | 10 | .39 | | Flowserve Corporation Officer Change In Control Severance Plan, amended and restated effective November 12, 2007 (filed herewith).* |
| | 10 | .40 | | Flowserve Corporation Key Management Change In Control Severance Plan, amended and restated effective November 12, 2007 (filed herewith).* |
| | 10 | .41 | | Flowserve Corporation Executive Officer Life Insurance Plan, effective January 1, 2004, filed as Exhibit 10.51 to the Company’s Annual Report onForm 10-K for the year ended December 31, 2005.* |
| | 10 | .42 | | Flowserve Corporation Senior Management Retirement Plan, amended and restated effective January 1, 2008 (filed herewith).* |
| | 10 | .43 | | Flowserve Corporation Supplemental Executive Retirement Plan, amended and restated effective November 12, 2007 (filed herewith).* |
| | 10 | .44 | | Employment Extension Agreement between Flowserve Corporation and Lewis M. Kling, dated as of May 29, 2007, filed as Exhibit 10.1 to Flowserve Corporation’s Current Report onForm 8-K dated May 30, 2007.* |
| | 10 | .45 | | Employment Agreement between Flowserve Corporation and Mark A. Blinn, dated as of May 7, 2007, filed as Exhibit 10.2 to Flowserve Corporation’s Quarterly Report onForm 10-Q for the Quarter ended March 31, 2007.* |
| | 10 | .46 | | Employment Agreement between the Company and Lewis M. Kling, dated July 28, 2005, filed as Exhibit 10.1 to the Company’s Current Report onForm 8-K, dated as of August 3, 2005.* |
| | 10 | .47 | | Flowserve Corporation 2004 Stock Compensation Plan, effective April 21, 2004, filed as Appendix A to the Company’s Proxy Statement, dated May 10, 2004.* |
| | 10 | .48 | | Form of Performance Restricted Stock Unit Agreement with non-competition covenant, pursuant to Flowserve Corporation’s 2004 Stock Compensation Plan, filed as Exhibit 10.2 to Flowserve Corporation’s Quarterly Report onForm 10-Q for the Quarter ended June 30, 2007.* |
| | 10 | .49 | | Form of Performance Restricted Stock Unit Agreement pursuant to Flowserve Corporation’s 2004 Stock Compensation Plan, filed as Exhibit 10.3 to Flowserve Corporation’s Quarterly Report onForm 10-Q for the Quarter ended June 30, 2007.* |
| | 10 | .50 | | Form of Restricted Stock Agreement with non-competition covenant, pursuant to Flowserve Corporation’s 2004 Stock Compensation Plan, filed as Exhibit 10.4 to Flowserve Corporation’s Quarterly Report onForm 10-Q for the Quarter ended June 30, 2007.* |
| | 10 | .51 | | Form of Restricted Stock Agreement pursuant to Flowserve Corporation’s 2004 Stock Compensation Plan, filed as Exhibit 10.5 to Flowserve Corporation’s Quarterly Report onForm 10-Q for the Quarter ended June 30, 2007.* |
| | 10 | .52 | | Form of Restricted Stock Agreement with total shareholder return and return on net assets performance measures, pursuant to Flowserve Corporation’s 2004 Stock Compensation Plan, filed as Exhibit 10.6 to Flowserve Corporation’s Quarterly Report onForm 10-Q for the Quarter ended June 30, 2007.* |
| | 10 | .53 | | Form of Restricted Stock Agreement pursuant to the Company’s 2004 Stock Compensation Plan, filed as Exhibit 10.59 to the Company’s Annual Report onForm 10-K for the year ended December 31, 2004.* |
| | 10 | .54 | | Form of Incentive Stock Option Agreement pursuant to the Company’s 2004 Stock Compensation Plan, filed as Exhibit 10.60 to the Company’s Annual Report onForm 10-K for the year ended December 31, 2004.* |
| | 10 | .55 | | Form of Non-Qualified Stock Option Agreement pursuant to the Company’s 2004 Stock Compensation Plan, filed as Exhibit 10.61 to the Company’s Annual Report onForm 10-K for the year ended December 31, 2004.* |
| | 10 | .56 | | Form of Restricted Stock Agreement for certain officers pursuant to the Company’s 2004 Stock Compensation Plan, filed as Exhibit 10.3 to the Company’s Current Report onForm 8-K, dated as of March 9, 2006.* |
| | 10 | .57 | | Form of Incentive Stock Option Agreement for certain officers pursuant to the Company’s 2004 Stock Compensation Plan filed as Exhibit 10.4 to the Company’s Current Report onForm 8-K, dated March 9, 2006.* |
113
| | | | | |
Exhibit
| | |
No. | | Description |
| |
| | 10 | .58 | | The Duriron Company, Inc. Incentive Compensation Plan for Key Employees as Amended and Restated, effective January 1, 1992, filed as Exhibit 10.68 to the Company’s Annual Report onForm 10-K for the year ended December 31, 2005.* |
| | 10 | .59 | | Amendment to The Duriron Company, Inc. Incentive Compensation Plan for Key Employees as Amended and Restated, effective January 1, 1992, dated December 14, 2005, filed as Exhibit 10.63 to the Company’s Annual Report onForm 10-K for the year ended December 31, 2004.* |
| | 10 | .60 | | Duriron Equity Incentive Plan, as amended and restated effective July 21, 1995, filed as Exhibit 10.25 to the Company’s Annual Report onForm 10-K for the year ended December 31, 1995.* |
| | 10 | .61 | | Duriron Company, Inc. Deferred Compensation Plan for Executives, filed as Exhibit 10.72 to the Company’s Annual Report onForm 10-K for the year ended December 31, 2005.* |
| | 10 | .62 | | Duriron Company, Inc. Deferred Compensation Plan for Directors, effective December 31, 1987, filed as Exhibit 10.73 to the Company’s Annual Report onForm 10-K for the year ended December 31, 2005.* |
| | 10 | .63 | | Flowserve Corporation Amended and Restated Non-Employee Directors’ Stock Option Plan, as amended and restated on December 29, 2005, filed as Exhibit 10.74 to the Company’s Annual Report onForm 10-K for the year ended December 31, 2005.* |
| | 10 | .64 | | Form of Restrictive Covenants Agreement entered into on March 6, 2006 between the Company and each of Linda P. Jojo, Thomas L. Pajonas and Paul W. Fehlman, filed as Exhibit 10.1 to the Company’s Current Report onForm 8-K, dated as of March 9, 2006.* |
| | 10 | .65 | | Form of Restrictive Covenants Agreement entered into on March 6, 2006 between the Company and each of Lewis M. Kling, Mark A. Blinn, Ronald F. Shuff, John H. Jacko, Jr., Mark D. Dailey, Thomas E. Ferguson, Andrew J. Beall, Jerry L. Rockstroh, Richard J. Guiltinan, Jr., and Deborah K. Bethune, filed as Exhibit 10.2 to the Company’s Current Report onForm 8-K, dated as of March 9, 2006.* |
| | 14 | .1 | | Flowserve Financial Management Code of Ethics adopted by the Company’s principal executive officer and CEO, principal financial officer and CFO, principal accounting officer and controller, and other senior financial managers filed as Exhibit 14.1 to the Company’s Annual Report onForm 10-K for the year ended December 31, 2002. |
| | 21 | .1 | | Subsidiaries of the Company (filed herewith). |
| | 23 | .1 | | Consent of PricewaterhouseCoopers LLP (filed herewith). |
| | 31 | .1 | | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). |
| | 31 | .2 | | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). |
| | 32 | .1 | | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith). |
| | 32 | .2 | | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith). |
| | |
* | | Management contracts and compensatory plans and arrangements required to be filed as exhibits to this Annual Report onForm 10-K. |
114
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, on the 27th day of February 2008.authorized.
FLOWSERVE CORPORATION
(Registrant)
Lewis M. Kling
President and Chief Executive Officer
Date: February 25, 2009
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/ Kevin E. Sheehan
Kevin E. Sheehan | | Non-Executive Chairman of the Board and Member of Audit Committee | | February 27, 200825, 2009 |
| | | | | |
/s/ Lewis M. Kling
Lewis M. Kling | | President, Chief Executive Officer and Director (Principal Executive Officer) | | February 27, 200825, 2009 |
| | | | | |
/s/ Mark A. Blinn
Mark A. Blinn | | Senior Vice President, Chief Financial Officer and Latin America Operations (Principal Financial Officer) | | February 27, 200825, 2009 |
| | | | | |
/s/ Richard J. Guiltinan, Jr.
Richard J. Guiltinan, Jr. | | Vice President, Controller and Chief Accounting Officer (Principal Accounting Officer) | | February 27, 200825, 2009 |
| | | | |
/s/ Gayla J. Delly
Gayla J. Delly | | Director | | February 25, 2009 |
| | | | |
/s/ John R. Friedery
John R. Friedery | | Director | | February 25, 2009 |
| | | | |
/s/ Joseph E. Harlan
Joseph E. Harlan | | Director | | February 25, 2009 |
| | | | | |
/s/ Michael F. Johnston
Michael F. Johnston | | Director Chairman of Finance Committee, Member of Corporate Governance and Nominating Committee | | February 27, 200825, 2009 |
| | | | |
/s/ Rick J. Mills
Rick J. Mills | | Director | | February 25, 2009 |
| | | | | |
/s/ James O. Rollans
James O. Rollans | | Director Chairman of Audit Committee, Member of Corporate Governance and Nominating Committee | | February 27, 2008 |
| | | | |
/s/ Diane C. Harris
Diane C. Harris | | Director and Member of Finance Committee | | February 27, 2008 |
| | | | |
/s/ John R. Friedery
John R. Friedery | | Director and Member of Audit Committee | | February 27, 2008 |
| | | | |
/s/ Joseph E. Harlan
Joseph E. Harlan | | Director and Member of Finance Committee | | February 27, 2008 |
| | | | |
/s/ Rick J. Mills
Rick J. Mills | | Director and Member of Audit Committee | | February 27, 200825, 2009 |
115114
FLOWSERVE CORPORATION
Schedule II — Valuation and Qualifying Accounts
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Column A | | Column B | | Column C | | Column D | | Column E | | | Column B | | Column C | | Column D | | Column E | |
| | | | | | | Additions
| | | | | | | | | | | Additions
| | | | | |
| | | | | | | Charged to
| | | | | | | | | | | Charged to
| | | | | |
| | | | | | | Other
| | | | | | | | | | | Other
| | | | | |
| | | | | Additions
| | Accounts—
| | | | | | | | | Additions
| | Accounts—
| | | | | |
| | | Balance at
| | Charged to
| | Acquisitions
| | | | | | | Balance at
| | Charged to
| | Acquisitions
| | | | Column E
| |
| | | Beginning of
| | Cost and
| | and Related
| | Deductions
| | Balance at
| | | Beginning of
| | Cost and
| | and Related
| | Deductions
| | Balance at
| |
Description | | Year | | Expenses | | Adjustments | | from Reserve | | End of Year | | | Year | | Expenses | | Adjustments | | From Reserve | | end of Year | |
| | | (Amounts in thousands) | | | (Amounts in thousands) | |
| |
| Year ended December 31, 2008 | | | | | | | | | | | | | | | | | | | | | |
| Allowance for doubtful accounts(a): | | | $ | 14,219 | | | $ | 21,457 | | | $ | — | | | $ | (12,009 | ) | | $ | 23,667 | |
| Deferred tax asset valuation allowance(b): | | | | 22,138 | | | | 3,564 | | | | 1,620 | | | | (10,114 | ) | | | 17,208 | |
| Year ended December 31, 2007: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Allowance for doubtful accounts(a): | | $ | 13,135 | | | $ | 3,341 | | | $ | — | | | $ | (2,257 | ) | | $ | 14,219 | | | | 13,135 | | | | 3,341 | | | | — | | | | (2,257 | ) | | | 14,219 | |
| Deferred tax asset valuation allowance(b): | | $ | 33,733 | | | $ | 6,922 | | | $ | (574 | ) | | $ | (17,943 | ) | | $ | 22,138 | | | | 33,733 | | | | 6,922 | | | | (574 | ) | | | (17,943 | ) | | | 22,138 | |
| Year ended December 31, 2006: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Allowance for doubtful accounts(a): | | $ | 14,271 | | | $ | 1,148 | | | $ | — | | | $ | (2,284 | ) | | $ | 13,135 | | | | 14,271 | | | | 1,148 | | | | — | | | | (2,284 | ) | | | 13,135 | |
| Deferred tax asset valuation allowance(b): | | $ | 30,401 | | | $ | 6,036 | | | $ | — | | | $ | (2,704 | ) | | $ | 33,733 | | | | 30,401 | | | | 6,036 | | | | — | | | | (2,704 | ) | | | 33,733 | |
| Year ended December 31, 2005: | | | | | | | | | | | | | | | | | | | | | |
| Allowance for doubtful accounts(a): | | $ | 7,281 | | | $ | 3,594 | | | $ | 3,431 | | | $ | (35 | ) | | $ | 14,271 | | |
| Deferred tax asset valuation allowance(b): | | $ | 34,208 | | | $ | 3,999 | | | $ | 3,304 | | | $ | (11,110 | ) | �� | $ | 30,401 | | |
| | |
| (a) | | Deductions from reserve represent accounts written off, net of recoveries, and reductions due to improved aging of receivables. |
| |
| (b) | | Deductions from reserve result from the expiration or utilization of net operating losses and foreign tax credits previously reserved. |
F-1
INDEX TO EXHIBITS
| | | | | | | | | |
Exhibit
| Exhibit
| | | Exhibit
| | |
No. | No. | | Description | No. | | Description |
| |
| | 3 | .1 | | Restated Certificate of Incorporation of Flowserve Corporation, filed as Exhibit 3.(i) to Flowserve Corporation’s Current Report onForm 8-K/A, dated August 16, 2006. | 3 | .1 | | Restated Certificate of Incorporation of Flowserve Corporation (incorporated by reference to Exhibit 3.(i) to the Registrant’s Current Report onForm 8-K/A, dated August 16, 2006). |
| | 3 | .2 | | Amended and Restated By-Laws of Flowserve Corporation, effective as of January 1, 2008 and filed as Exhibit 2.1 to Flowserve Corporation’s Current Report onForm 8-K, dated December 19, 2007. | 3 | .2 | | Amended and Restated By-Laws of Flowserve Corporation, effective as of November 20, 2008 (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report onForm 8-K, dated November 21, 2008). |
| | 4 | .1 | | Lease agreement and indenture, dated as of January 1, 1995 and bond purchase agreement, dated January 27, 1995, in connection with an 8% Taxable Industrial Development Revenue Bond, City of Albuquerque, New Mexico. (Relates to a class of indebtedness that does not exceed 10% of the total assets of the Company. The Company will furnish a copy of the documents to the Commission upon request.) | 4 | .1 | | Lease agreement and indenture, dated as of January 1, 1995 and bond purchase agreement, dated January 27, 1995, in connection with an 8% Taxable Industrial Development Revenue Bond, City of Albuquerque, New Mexico. (Relates to a class of indebtedness that does not exceed 10% of the total assets of the Company. The Company will furnish a copy of the documents to the Commission upon request.) |
| | 10 | .1 | | Credit Agreement, dated as of August 12, 2005, among the Company, the lenders referred therein, and Bank of America, N.A., as swingline lender, administrative agent and collateral agent, filed as Exhibit 10.1 to the Company’s Current Report onForm 8-K, dated as of August 17, 2005. | 10 | .1 | | Credit Agreement, dated as of August 12, 2005, among the Company, the lenders referred therein, and Bank of America, N.A., as swingline lender, administrative agent and collateral agent (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report onForm 8-K, dated August 17, 2005). |
| | 10 | .2 | | Amendment and Waiver, dated December 20, 2005 and effective December 23, 2005, to that certain Credit Agreement, dated as of August 12, 2005, among the Company, the financial institutions from time to time party thereto, and Bank of America, N.A., as Swingline Lender, Administrative Agent and Collateral Agent, filed as Exhibit 10.1 to the Company’s Current Report onForm 8-K, dated as of December 30, 2005. | 10 | .2 | | Amendment and Waiver, dated December 20, 2005 and effective December 23, 2005, to that certain Credit Agreement, dated as of August 12, 2005, among the Company, the financial institutions from time to time party thereto, and Bank of America, N.A., as Swingline Lender, Administrative Agent and Collateral Agent (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report onForm 8-K, dated December 30, 2005). |
| | 10 | .3 | | Second Amendment dated as of May 8, 2006 and effective as of May 16, 2006 to that certain Credit Agreement dated as of August 12, 2005, filed as Exhibit 10.1 to the Company’s Current Report onForm 8-K, dated as of May 19, 2006. | 10 | .3 | | Second Amendment dated as of May 8, 2006 and effective as of May 16, 2006 to that certain Credit Agreement dated as of August 12, 2005 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report onForm 8-K, dated as of May 19, 2006). |
| | 10 | .4 | | Third Amendment to Credit Agreement and First Amendment to Pledge Agreement dated as of August 7, 2007, among Flowserve Corporation, the lenders named therein and Bank of America, N.A., as administrative agent, swingline lender and collateral agent, filed as Exhibit 10.6 to Flowserve Corporation’s Quarterly Report onForm 10-Q for the Quarter ended June 30, 2007. | 10 | .4 | | Third Amendment to Credit Agreement and First Amendment to Pledge Agreement dated as of August 7, 2007, among Flowserve Corporation, the lenders named therein and Bank of America, N.A., as administrative agent, swingline lender and collateral agent (incorporated by reference to Exhibit 10.6 to the Registrant’s Quarterly Report onForm 10-Q for the quarter ended June 30, 2007). |
| | 10 | .5 | | Flowserve Corporation Director Cash Deferral Plan, as amended and restated in connection with the bifurcation of the Flowserve Corporation Director Deferral Plan, effective October 1, 2000, filed as Exhibit 10.3 to the Company’s Annual Report onForm 10-K for the year ended December 31, 2000.* | 10 | .5 | | 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 hereto, the various Lenders from time to time party as a hereto, 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 onForm 8-K, dated September 19, 2007). |
| | 10 | .6 | | Amendment to the Flowserve Corporation Amended and Restated Director Cash Deferral Plan, dated December 14, 2005, filed as Exhibit 10.67 to the Company’s Annual Report onForm 10-K for the year ended December 31, 2004.* | 10 | .6 | | 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 onForm 8-K, dated September 16, 2008). |
| | 10 | .7 | | Flowserve Corporation Director Stock Deferral Plan, as amended and restated in connection with the bifurcation of the Flowserve Corporation Director Deferral Plan, effective October 1, 2000, filed as Exhibit 10.3 to the Company’s Annual Report onForm 10-K for the year ended December 31, 2000.* | 10 | .7+ | | Amended and Restated Flowserve Corporation Director Cash Deferral Plan, effective January 1, 2009.* |
| | 10 | .8 | | First Master Benefit Trust Agreement, dated October 1, 1987, filed as Exhibit 10.24 to the Company’s Annual Report onForm 10-K for the year ended December 31, 1987.* | 10 | .8+ | | Amended and Restated Flowserve Corporation Director Stock Deferral Plan, dated effective January 1, 2009.* |
| | 10 | .9 | | Amendment No. 1 to the First Master Benefit Trust Agreement, dated October 1, 1987, filed as Exhibit 10.24 to the Company’s Annual Report onForm 10-K for the year ended December 31, 1993.* | 10 | .9 | | First Master Benefit Trust Agreement, dated October 1, 1987 (incorporated by reference to Exhibit 10.24 to the Registrant’s Annual Report onForm 10-K for the year ended December 31, 1987).* |
| | 10 | .10 | | Amendment No. 2 to First Master Benefit Trust Agreement, dated October 1, 1987, filed as Exhibit 10.25 to the Company’s Annual Report onForm 10-K for the year ended December 31, 1994.* | 10 | .10 | | Amendment No. 1 to the First Master Benefit Trust Agreement, dated October 1, 1987 (incorporated by reference to Exhibit 10.24 to the Registrant’s Annual Report onForm 10-K for the year ended December 31, 1993).* |
| | 10 | .11 | | Amendment to Master Benefit Trust Agreement, filed as Exhibit 10.45 to the Company’s Annual Report onForm 10-K for the year ended December 31, 2000.* | 10 | .11 | | Amendment No. 2 to First Master Benefit Trust Agreement, dated October 1, 1987 (incorporated by reference to Exhibit 10.25 to the Registrant’s Annual Report onForm 10-K for the year ended December 31, 1994).* |
| | 10 | .12 | | Amendment to The Duriron Company, Inc. First Master Benefit Trust Agreement, dated December 14, 2005, filed as Exhibit 10.66 to the Company’s Annual Report onForm 10-K for the year ended December 31, 2004.* | 10 | .12 | | Amendment to Master Benefit Trust Agreement (incorporated by reference to Exhibit 10.45 to the Registrant’s Annual Report onForm 10-K for the year ended December 31, 2000).* |
| | 10 | .13 | | Second Master Benefit Trust Agreement, dated October 1, 1987, filed as Exhibit 10.12 to the Company’s Annual Report onForm 10-K for the year ended December 31, 1987.* | 10 | .13 | | Amendment to The Duriron Company, Inc. First Master Benefit Trust Agreement, dated December 14, 2005 (incorporated by reference to Exhibit 10.66 to the Registrant’s Annual Report onForm 10-K for the year ended December 31, 2004).* |
| | 10 | .14 | | First Amendment to Second Master Benefit Trust Agreement, dated December 22, 1994, filed as Exhibit 10.26 to the Company’s Annual Report onForm 10-K for the year ended December 31, 1994.* | 10 | .14 | | Second Master Benefit Trust Agreement, dated October 1, 1987 (incorporated by reference to Exhibit 10.12 to the Registrant’s Annual Report onForm 10-K for the year ended December 31, 1987).* |
| | 10 | .15 | | Flowserve Corporation Long-Term Cash Incentive Plan, as amended and restated in connection with the bifurcation of the Flowserve Corporation Long-Term Incentive Plan, effective October 1, 2000, filed as Exhibit 10.10 to the Company’s Annual Report onForm 10-K for the year ended December 31, 2000.* | |
| | | | | | | | | |
Exhibit
| Exhibit
| | | Exhibit
| | |
No. | No. | | Description | No. | | Description |
| |
| | 10 | .16 | | Flowserve Corporation Long-Term Stock Incentive Plan, as amended and restated in connection with the bifurcation of the Flowserve Corporation Long-Term Incentive Plan, effective October 1, 2000, filed as Exhibit 10.10 to the Company’s Annual Report onForm 10-K for the year ended December 31, 2000.* | 10 | .15 | | First Amendment to Second Master Benefit Trust Agreement, dated December 22, 1994 (incorporated by reference to Exhibit 10.26 to the Registrant’s Annual Report onForm 10-K for the year ended December 31, 1994).* |
| | 10 | .17 | | 2007 Flowserve Corporation Long-Term Stock Incentive Plan, effective January 1, 2007, filed as Appendix A to the Company’s Proxy Statement, dated April 13, 2007.* | 10 | .16+ | | Amendment to The Duriron Company, Inc. First Master Benefit Trust Agreement and The Duriron, Inc. Second Master Benefit Trust Agreement, dated December 22, 2008.* |
| | 10 | .18 | | 2007 Flowserve Corporation Annual Incentive Plan, effective January 1, 2007, filed as Appendix B to the Company’s Proxy Statement, dated April 13, 2007.* | 10 | .17 | | Flowserve Corporation Long-Term Cash Incentive Plan, as amended and restated in connection with the bifurcation of the Flowserve Corporation Long-Term Incentive Plan, effective October 1, 2000 (incorporated by reference to Exhibit 10.10 to the Registrant’s Annual Report onForm 10-K for the year ended December 31, 2000).* |
| | 10 | .19 | | Flowserve Corporation Deferred Compensation Plan, filed as Exhibit 10.23 to the Company’s Annual Report onForm 10-K for the year ended December 31, 2000.* | 10 | .18 | | Flowserve Corporation Long-Term Stock Incentive Plan, as amended and restated in connection with the bifurcation of the Flowserve Corporation Long-Term Incentive Plan, effective October 1, 2000 (incorporated by reference to Exhibit 10.10 to the Registrant’s Annual Report onForm 10-K for the year ended December 31, 2000).* |
| | 10 | .20 | | Amendment No. 1 to the Flowserve Corporation Deferred Compensation Plan, as amended and restated, effective June 1, 2000, filed as Exhibit 10.50 to the Company’s Annual Report onForm 10-K for the year ended December 31, 2002.* | 10 | .19 | | 2007 Flowserve Corporation Long-Term Stock Incentive Plan, effective January 1, 2007 (incorporated by reference to Appendix A to the Registrant’s Proxy Statement, dated April 13, 2007).* |
| | 10 | .21 | | Amendment to the Flowserve Corporation Deferred Compensation Plan, dated December 14, 2005, filed as Exhibit 10.70 to the Company’s Annual Report onForm 10-K for the year ended December 31, 2004.* | 10 | .20 | | 2007 Flowserve Corporation Annual Incentive Plan, effective January 1, 2007 (incorporated by reference to Appendix B to the Registrant’s Proxy Statement, dated April 13, 2007).* |
| | 10 | .22 | | Amendment No. 3 to the Flowserve Corporation Deferred Compensation Plan, as amended and restated effective June 1, 2000 (filed herewith). | 10 | .21+ | | Amendment Number One to the 2007 Flowserve Corporation Annual Incentive Plan, dated December 18, 2008.* |
| | 10 | .23 | | The Duriron Company, Inc. 1997 Stock Option Plan, attached as Exhibit A to the Company’s Proxy Statement, filed on March 17, 1997.* | 10 | .22 | | Flowserve Corporation Deferred Compensation Plan (incorporated by reference to Exhibit 10.23 to the Registrant’s Annual Report onForm 10-K for the year ended December 31, 2000).* |
| | 10 | .24 | | First Amendment to the Flowserve Corporation 1997 Stock Option Plan, filed as Exhibit 10.28 to the Company’s Quarterly Report onForm 10-Q for the quarter ended June 30, 1998* | 10 | .23 | | 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 onForm 10-K for the year ended December 31, 2002).* |
| | 10 | .25 | | Amendment No. 2 to the Flowserve Corporation 1997 Stock Option Plan, filed as Exhibit 10.29 to the Company’s Annual Report onForm 10-K for the year ended December 31, 1999.* | 10 | .24 | | 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 onForm 10-K for the year ended December 31, 2004).* |
| | 10 | .26 | | Amendment No. 3 to the Flowserve Corporation 1997 Stock Option Plan, filed as Exhibit 10.29 to the Company’s Annual Report onForm 10-K for the year ended December 31, 2000.* | 10 | .25 | | 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 onForm 10-K for the year ended December 31, 2007).* |
| | 10 | .27 | | Flowserve Corporation 1998 Restricted Stock Plan, attached as Appendix A to the Company’s 1999 Proxy Statement, filed on April 9, 1998.* | 10 | .26 | | Flowserve Corporation 1999 Stock Option Plan (incorporated by reference to Exhibit A to the Registrant’s 1999 Proxy Statement, filed on March 15, 1999).* |
| | 10 | .28 | | Amendment No. 1 to the Flowserve Corporation 1998 Restricted Stock Plan, filed as Exhibit 10 to the Company’s Quarterly Report onForm 10-Q for the quarter ended March 31, 1999.* | 10 | .27 | | Amendment No. 1 to the Flowserve Corporation 1999 Stock Option Plan (incorporated by reference to Exhibit 10.31 to the Registrant’s Annual Report onForm 10-K for the year ended December 31, 1999).* |
| | 10 | .29 | | Amendment No. 2 to the Flowserve Corporation 1998 Restricted Stock Plan, filed as Exhibit 10.1 to the Company’s Quarterly Report onForm 10-Q for the quarter ended June 30, 1999.* | 10 | .28 | | Amendment No. 2 to the Flowserve Corporation 1999 Stock Option Plan (incorporated by reference to Exhibit 10.32 to the Registrant’s Annual Report onForm 10-K for the year ended December 31, 2000).* |
| | 10 | .30 | | Amendment No. 3 to the Flowserve Corporation 1998 Restricted Stock Plan, filed as Exhibit 10.37 to the Company’s Annual Report onForm 10-K for the year ended December 31, 2000.* | 10 | .29 | | Amendment No. 3 to the Flowserve Corporation 1999 Stock Option Plan (incorporated by reference to Exhibit 10.12 to the Registrant’s Quarterly Report onForm 10-Q for the quarter ended March 31, 2008).* |
| | 10 | .31 | | Amendment No. 4 to the Flowserve Corporation 1998 Restricted Stock Plan, filed as Exhibit 10.1 to the Company’s Quarterly Report onForm 10-Q for the quarter ended June 30, 2001.* | 10 | .30+ | | Flowserve Corporation Officer Severance Plan, amended and restated effective January 1, 2009.* |
| | 10 | .32 | | Amendment No. 5 to the Flowserve Corporation 1998 Restricted Stock Plan, filed as Exhibit 4.16 to the Company’s Registration Statement onForm S-8, filed September 29, 2006.* | 10 | .31 | | 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 onForm 10-K for the year ended December 31, 2007).* |
| | 10 | .33 | | Flowserve Corporation 1998 Restricted Stock Dividend Plan, effective October 1, 2000, filed as Exhibit 10.38 to the Company’s Annual Report onForm 10-K for the year ended December 31, 2000 | 10 | .32 | | 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 onForm 10-K for the year ended December 31, 2007).* |
| | 10 | .34 | | Flowserve Corporation 1999 Stock Option Plan, attached as Exhibit A to the Company’s 1999 Proxy Statement, filed on March 15, 1999.* | 10 | .33 | | 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 onForm 10-K for the year ended December 31, 2007).* |
| | 10 | .35 | | Amendment No. 1 to the Flowserve Corporation 1999 Stock Option Plan, filed as Exhibit 10.31 to the Company’s Annual Report onForm 10-K for the year ended December 31, 1999.* | 10 | .34 | | 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 onForm 10-K for the year ended December 31, 2007).* |
| | 10 | .36 | | Amendment No. 2 to the Flowserve Corporation 1999 Stock Option Plan, filed as Exhibit 10.32 to the Company’s Annual Report onForm 10-K for the year ended December 31, 2000.* | |
| | 10 | .37 | | Flowserve Corporation Officer Severance Plan, amended and restated effective January 1, 2007, filed as Exhibit 10.1 to the Company’s Quarterly Report onForm 10-K for the Quarter ended March 31, 2007.* | |
| | 10 | .38 | | Flowserve Corporation Executive Officer Change In Control Severance Plan, amended and restated effective November 12, 2007 (filed herewith).* | |
| | 10 | .39 | | Flowserve Corporation Officer Change In Control Severance Plan, amended and restated effective November 12, 2007 (filed herewith).* | |
| | | | | | | | | |
Exhibit
| Exhibit
| | | Exhibit
| | |
No. | No. | | Description | No. | | Description |
| |
| | 10 | .40 | | Flowserve Corporation Key Management Change In Control Severance Plan, amended and restated effective November 12, 2007 (filed herewith).* | 10 | .35 | | 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 onForm 10-K for the year ended December 31, 2007).* |
| | 10 | .41 | | Flowserve Corporation Executive Officer Life Insurance Plan, effective January 1, 2004, filed as Exhibit 10.51 to the Company’s Annual Report onForm 10-K for the year ended December 31, 2005.* | 10 | .36 | | Employment Agreement between Flowserve Corporation and Mark A. Blinn, dated as of May 7, 2007 (incorporated by reference to Exhibit 10.2 to Flowserve Corporation’s Quarterly Report onForm 10-Q for the Quarter ended March 31, 2007).* |
| | 10 | .42 | | Flowserve Corporation Senior Management Retirement Plan, amended and restated effective January 1, 2008 (filed herewith).* | 10 | .37+ | | Amendment Number One to the Mark Blinn Employment Agreement between Flowserve Corporation and Mark A. Blinn, dated November 19, 2008.* |
| | 10 | .43 | | Flowserve Corporation Supplemental Executive Retirement Plan, amended and restated effective November 12, 2007 (filed herewith).* | 10 | .38+ | | Amendment Number Two to the Mark Blinn Employment Agreement between Flowserve Corporation and Mark A. Blinn, dated February 23, 2009.* |
| | 10 | .44 | | Employment Extension Agreement between Flowserve Corporation and Lewis M. Kling, dated as of May 29, 2007, filed as Exhibit 10.1 to Flowserve Corporation’s Current Report onForm 8-K dated May 30, 2007.* | 10 | .39 | | Employment Agreement between Flowserve Corporation and Lewis M. Kling, dated July 28, 2005 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report onForm 8-K, dated as of August 3, 2005).* |
| | 10 | .45 | | Employment Agreement between Flowserve Corporation and Mark A. Blinn, dated as of May 7, 2007, filed as Exhibit 10.2 to Flowserve Corporation’s Quarterly Report onForm 10-Q for the Quarter ended March 31, 2007.* | 10 | .40 | | Employment Extension Agreement between Flowserve Corporation and Lewis M. Kling, dated as of May 29, 2007 (incorporated by reference to Exhibit 10.1 to Flowserve Corporation’s Current Report onForm 8-K dated May 30, 2007).* |
| | 10 | .46 | | Employment Agreement between the Company and Lewis M. Kling, dated July 28, 2005, filed as Exhibit 10.1 to the Company’s Current Report onForm 8-K, dated as of August 3, 2005.* | 10 | .41+ | | Amendment to Employment Agreement between Flowserve Corporation and Lewis M. Kling, dated November 19, 2008.* |
| | 10 | .47 | | Flowserve Corporation 2004 Stock Compensation Plan, effective April 21, 2004, filed as Appendix A to the Company’s Proxy Statement, dated May 10, 2004.* | 10 | .42 | | 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 | .48 | | Form of Performance Restricted Stock Unit Agreement with non-competition covenant, pursuant to Flowserve Corporation’s 2004 Stock Compensation Plan, filed as Exhibit 10.2 to Flowserve Corporation’s Quarterly Report onForm 10-Q for the Quarter ended June 30, 2007.* | 10 | .43 | | 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 onForm 10-Q for the quarter ended March 31, 2008).* |
| | 10 | .49 | | Form of Performance Restricted Stock Unit Agreement pursuant to Flowserve Corporation’s 2004 Stock Compensation Plan, filed as Exhibit 10.3 to Flowserve Corporation’s Quarterly Report onForm 10-Q for the Quarter ended June 30, 2007.* | 10 | .44 | | 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 onForm 10-Q for the quarter ended March 31, 2008).* |
| | 10 | .50 | | Form of Restricted Stock Agreement with non-competition covenant, pursuant to Flowserve Corporation’s 2004 Stock Compensation Plan, filed as Exhibit 10.4 to Flowserve Corporation’s Quarterly Report onForm 10-Q for the Quarter ended June 30, 2007.* | 10 | .45 | | Form of Performance Restricted Stock Unit Agreement with non-competition covenant, pursuant to Flowserve Corporation’s 2004 Stock Compensation Plan (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report onForm 10-Q for the quarter ended June 30, 2007).* |
| | 10 | .51 | | Form of Restricted Stock Agreement pursuant to Flowserve Corporation’s 2004 Stock Compensation Plan, filed as Exhibit 10.5 to Flowserve Corporation’s Quarterly Report onForm 10-Q for the Quarter ended June 30, 2007.* | 10 | .46 | | Form 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 onForm 10-Q for the quarter ended June 30, 2007).* |
| | 10 | .52 | | Form of Restricted Stock Agreement with total shareholder return and return on net assets performance measures, pursuant to Flowserve Corporation’s 2004 Stock Compensation Plan, filed as Exhibit 10.6 to Flowserve Corporation’s Quarterly Report onForm 10-Q for the Quarter ended June 30, 2007.* | 10 | .47 | | Form of Restricted Stock Agreement with non-competition covenant, pursuant to Flowserve Corporation’s 2004 Stock Compensation Plan (incorporated by reference to Exhibit 10.4 to the Registrant’s Quarterly Report onForm 10-Q for the quarter ended June 30, 2007).* |
| | 10 | .53 | | Form of Restricted Stock Agreement pursuant to the Company’s 2004 Stock Compensation Plan, filed as Exhibit 10.59 to the Company’s Annual Report onForm 10-K for the year ended December 31, 2004.* | 10 | .48 | | Form of Restricted Stock Agreement pursuant to Flowserve Corporation’s 2004 Stock Compensation Plan (incorporated by reference to Exhibit 10.5 to the Registrant’s Quarterly Report onForm 10-Q for the quarter ended June 30, 2007).* |
| | 10 | .54 | | Form of Incentive Stock Option Agreement pursuant to the Company’s 2004 Stock Compensation Plan, filed as Exhibit 10.60 to the Company’s Annual Report onForm 10-K for the year ended December 31, 2004.* | 10 | .49 | | Form of Restricted Stock Agreement with total shareholder return and return on net assets performance measures, pursuant to Flowserve Corporation’s 2004 Stock Compensation Plan (incorporated by reference to Exhibit 10.6 to the Registrant’s Quarterly Report onForm 10-Q for the quarter ended June 30, 2007).* |
| | 10 | .55 | | Form of Non-Qualified Stock Option Agreement pursuant to the Company’s 2004 Stock Compensation Plan, filed as Exhibit 10.61 to the Company’s Annual Report onForm 10-K for the year ended December 31, 2004.* | 10 | .50 | | Form of Restricted Stock Agreement pursuant to the Registrant’s 2004 Stock Compensation Plan (incorporated by reference to Exhibit 10.59 to the Registrant’s Annual Report onForm 10-K for the year ended December 31, 2004).* |
| | 10 | .56 | | Form of Restricted Stock Agreement for certain officers pursuant to the Company’s 2004 Stock Compensation Plan, filed as Exhibit 10.3 to the Company’s Current Report onForm 8-K, dated as of March 9, 2006.* | 10 | .51 | | 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 onForm 10-K for the year ended December 31, 2004).* |
| | 10 | .57 | | Form of Incentive Stock Option Agreement for certain officers pursuant to the Company’s 2004 Stock Compensation Plan filed as Exhibit 10.4 to the Company’s Current Report onForm 8-K, dated March 9, 2006.* | 10 | .52 | | 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 onForm 10-K for the year ended December 31, 2004).* |
| | 10 | .58 | | The Duriron Company, Inc. Incentive Compensation Plan for Key Employees as Amended and Restated, effective January 1, 1992, filed as Exhibit 10.68 to the Company’s Annual Report onForm 10-K for the year ended December 31, 2005.* | |
