UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2017☑QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2021 |
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROMto.FOR THE TRANSITION PERIOD FROMto. |
Commission File No. 1-13179
FLOWSERVE CORPORATION
(Exact name of registrant as specified in its charter)
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New York | | 31-0267900 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | | | |
5215 N. O’Connor Blvd., Suite 2300, Irving, Texas700, | Irving, | Texas | | 75039 |
(Address of principal executive offices) | | (Zip Code) |
( 972 ) 443-6500 | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
| (972) 443-6500 | | |
(Registrant’s telephone number, including area code) |
Former name, former address and former fiscal year, if changed since last report: N/A |
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Securities registered pursuant to Section 12(b) of the Act: |
Title of each class | Trading Symbol | Name of Each Exchange on Which Registered |
Common Stock, $1.25 Par Value | FLS | New York Stock Exchange |
| | |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ☑ Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). þ☑ Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “large accelerated filer” and “smaller reporting company”company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | ☑ | Accelerated filer | ☐ | Non-accelerated filer | ☐ |
Smaller reporting company | ☐ | Emerging growth company | ☐ | | |
| | |
Large accelerated filer þ
| Accelerated filer ¨
| Non-accelerated filer ¨ (do not check if a smaller reporting company)
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Smaller reporting company ¨
| Emerging growth company ¨
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨Yes þ☐ No☑
AsAs of October 23, 2017July 30, 2021 there were 130,635,017130,262,789shares of the issuer’s common stock outstanding.
FLOWSERVE CORPORATION
FORM 10-Q
TABLE OF CONTENTS
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EX-31.1 | |
EX-31.2 | |
EX-32.1 | |
EX-32.2 | |
EX-101 INSTANCE DOCUMENT | |
EX-101 SCHEMA DOCUMENT | |
EX-101 CALCULATION LINKBASE DOCUMENT | |
EX-101 LABELS LINKBASE DOCUMENT | |
EX-101 PRESENTATION LINKBASE DOCUMENT | |
EX-101 DEFINITION LINKBASE DOCUMENT | |
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PART I — FINANCIAL INFORMATION
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Item 1. | Financial Statements. |
Item 1.Financial Statements. FLOWSERVE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited) | | | | | | | | | | | |
(Amounts in thousands, except per share data) | Three Months Ended June 30, |
| 2021 | | 2020 |
Sales | $ | 898,178 | | | $ | 925,012 | |
Cost of sales | (619,940) | | | (655,305) | |
Gross profit | 278,238 | | | 269,707 | |
Selling, general and administrative expense | (210,789) | | | (229,343) | |
Gain on sale of business | 1,806 | | | 0 | |
Net earnings from affiliates | 2,907 | | | 3,088 | |
Operating income | 72,162 | | | 43,452 | |
Interest expense | (14,322) | | | (12,935) | |
| | | |
Interest income | 465 | | | 1,149 | |
Other income (expense), net | (7,850) | | | (18,907) | |
Earnings before income taxes | 50,455 | | | 12,759 | |
Provision for income taxes | (2,711) | | | (4,485) | |
Net earnings, including noncontrolling interests | 47,744 | | | 8,274 | |
Less: Net earnings attributable to noncontrolling interests | (2,390) | | | (2,142) | |
Net earnings attributable to Flowserve Corporation | $ | 45,354 | | | $ | 6,132 | |
Net earnings per share attributable to Flowserve Corporation common shareholders: | | | |
Basic | $ | 0.35 | | | $ | 0.05 | |
Diluted | 0.35 | | | 0.05 | |
| | | |
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| | | | | | | |
(Amounts in thousands, except per share data) | Three Months Ended September 30, |
| 2017 | | 2016 |
Sales | $ | 883,380 |
| | $ | 945,939 |
|
Cost of sales | (615,848 | ) | | (667,960 | ) |
Gross profit | 267,532 |
| | 277,979 |
|
Selling, general and administrative expense | (206,295 | ) | | (281,261 | ) |
Gain on sale of businesses
| 9,864 |
| | — |
|
Net earnings from affiliates | 2,918 |
| | 3,394 |
|
Operating income | 74,019 |
| | 112 |
|
Interest expense | (15,043 | ) | | (15,141 | ) |
Interest income | 1,108 |
| | 924 |
|
Other income, net | 8,285 |
| | 1,899 |
|
Earnings (loss) before income taxes | 68,369 |
| | (12,206 | ) |
Provision for income taxes | (19,628 | ) | | (2,827 | ) |
Net earnings (loss), including noncontrolling interests | 48,741 |
| | (15,033 | ) |
Less: Net earnings attributable to noncontrolling interests | (1,136 | ) | | (808 | ) |
Net earnings (loss) attributable to Flowserve Corporation | $ | 47,605 |
| | $ | (15,841 | ) |
Net earnings per share attributable to Flowserve Corporation common shareholders: | | | |
Basic | $ | 0.36 |
| | $ | (0.12 | ) |
Diluted | 0.36 |
| | (0.12 | ) |
Cash dividends declared per share | $ | 0.19 |
| | $ | 0.19 |
|
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited) | | | | | | | | | | | |
(Amounts in thousands) | Three Months Ended June 30, |
| 2021 | | 2020 |
Net earnings, including noncontrolling interests | $ | 47,744 | | | $ | 8,274 | |
Other comprehensive income (loss): | | | |
Foreign currency translation adjustments, net of taxes of $(6,401) and $(1,188), respectively | 13,998 | | | 19,048 | |
Pension and other postretirement effects, net of taxes of $(472) and $(444), respectively | 2,059 | | | 1,758 | |
Cash flow hedging activity | 15 | | | 44 | |
Other comprehensive income (loss) | 16,072 | | | 20,850 | |
Comprehensive income (loss), including noncontrolling interests | 63,816 | | | 29,124 | |
Comprehensive (income) loss attributable to noncontrolling interests | (2,403) | | | (2,079) | |
Comprehensive income (loss) attributable to Flowserve Corporation | $ | 61,413 | | | $ | 27,045 | |
|
| | | | | | | |
(Amounts in thousands) | Three Months Ended September 30, |
| 2017 | | 2016 |
Net earnings (loss), including noncontrolling interests | $ | 48,741 |
| | $ | (15,033 | ) |
Other comprehensive income (loss): | | | |
Foreign currency translation adjustments, net of taxes of $(10,501) and $9,285 respectively | 17,674 |
| | (15,587 | ) |
Pension and other postretirement effects, net of taxes of $(333) and $(925), respectively | (444 | ) | | 3,719 |
|
Cash flow hedging activity, net of taxes of $(200) in 2016 | 12 |
| | 560 |
|
Other comprehensive income (loss) | 17,242 |
| | (11,308 | ) |
Comprehensive income, including noncontrolling interests | 65,983 |
| | (26,341 | ) |
Comprehensive loss attributable to noncontrolling interests | (1,090 | ) | | (807 | ) |
Comprehensive income (loss) attributable to Flowserve Corporation | $ | 64,893 |
| | $ | (27,148 | ) |
See accompanying notes to condensed consolidated financial statements.
FLOWSERVE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited) | | | | | | | | | | | |
| | | |
(Amounts in thousands, except per share data) | Six Months Ended June 30, |
| 2021 | | 2020 |
Sales | $ | 1,755,486 | | | $ | 1,818,526 | |
Cost of sales | (1,226,348) | | | (1,282,360) | |
Gross profit | 529,138 | | | 536,166 | |
Selling, general and administrative expense | (409,104) | | | (474,794) | |
Gain on sale of business | 1,806 | | | 0 | |
Net earnings from affiliates | 6,425 | | | 6,283 | |
Operating income | 128,265 | | | 67,655 | |
Interest expense | (31,101) | | | (25,898) | |
Loss on extinguishment of debt | (7,610) | | | 0 | |
Interest income | 1,067 | | | 2,898 | |
Other income (expense), net | (19,213) | | | 19,295 | |
Earnings before income taxes | 71,408 | | | 63,950 | |
Provision for income taxes | (6,503) | | | (41,453) | |
Net earnings, including noncontrolling interests | 64,905 | | | 22,497 | |
Less: Net earnings attributable to noncontrolling interests | (5,471) | | | (4,243) | |
Net earnings attributable to Flowserve Corporation | $ | 59,434 | | | $ | 18,254 | |
Net earnings per share attributable to Flowserve Corporation common shareholders: | | | |
Basic | $ | 0.46 | | | $ | 0.14 | |
Diluted | 0.45 | | | 0.14 | |
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(Amounts in thousands, except per share data) | Nine Months Ended September 30, |
| 2017 | | 2016 |
Sales | $ | 2,626,762 |
| | $ | 2,919,553 |
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Cost of sales | (1,845,796 | ) | | (2,015,755 | ) |
Gross profit | 780,966 |
| | 903,798 |
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Selling, general and administrative expense | (681,181 | ) | | (747,513 | ) |
Gain on sale of businesses
| 141,158 |
| | — |
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Net earnings from affiliates | 9,027 |
| | 8,522 |
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Operating income | 249,970 |
| | 164,807 |
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Interest expense | (44,689 | ) | | (44,982 | ) |
Interest income | 2,373 |
| | 2,243 |
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Other (expense) income, net | (11,602 | ) | | 1,070 |
|
Earnings before income taxes | 196,052 |
| | 123,138 |
|
Provision for income taxes | (85,836 | ) | | (49,518 | ) |
Net earnings, including noncontrolling interests | 110,216 |
| | 73,620 |
|
Less: Net earnings attributable to noncontrolling interests | (1,682 | ) | | (1,222 | ) |
Net earnings attributable to Flowserve Corporation | $ | 108,534 |
| | $ | 72,398 |
|
Net earnings per share attributable to Flowserve Corporation common shareholders: | | | |
Basic | $ | 0.83 |
| | $ | 0.56 |
|
Diluted | 0.83 |
| | 0.55 |
|
Cash dividends declared per share | $ | 0.57 |
| | $ | 0.57 |
|
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited) | | | | | | | | | | | |
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(Amounts in thousands) | Six Months Ended June 30, |
| 2021 | | 2020 |
Net earnings, including noncontrolling interests | $ | 64,905 | | | $ | 22,497 | |
Other comprehensive income (loss): | | | |
Foreign currency translation adjustments, net of taxes of $(5,747) and $5,974, respectively | 3,109 | | | (77,013) | |
Pension and other postretirement effects, net of taxes of $(942) and $(842), respectively | 6,318 | | | 8,067 | |
Cash flow hedging activity | 217 | | | 98 | |
Other comprehensive income (loss) | 9,644 | | | (68,848) | |
Comprehensive income (loss), including noncontrolling interests | 74,549 | | | (46,351) | |
Comprehensive (income) loss attributable to noncontrolling interests | (5,633) | | | (5,018) | |
Comprehensive income (loss) attributable to Flowserve Corporation | $ | 68,916 | | | $ | (51,369) | |
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| | | |
(Amounts in thousands) | Nine Months Ended September 30, |
| 2017 | | 2016 |
Net earnings, including noncontrolling interests | $ | 110,216 |
| | $ | 73,620 |
|
Other comprehensive income (loss): | | | |
Foreign currency translation adjustments, net of taxes of $(50,964) and $7,492, respectively | 85,777 |
| | (12,577 | ) |
Pension and other postretirement effects, net of taxes of $(996) and $(3,545), respectively | (1,102 | ) | | 9,655 |
|
Cash flow hedging activity, net of taxes of $(34) and $(620), respectively | 96 |
| | 1,763 |
|
Other comprehensive income (loss) | 84,771 |
| | (1,159 | ) |
Comprehensive income, including noncontrolling interests | 194,987 |
| | 72,461 |
|
Comprehensive income attributable to noncontrolling interests | (2,169 | ) | | (1,983 | ) |
Comprehensive income attributable to Flowserve Corporation | $ | 192,818 |
| | $ | 70,478 |
|
See accompanying notes to condensed consolidated financial statements.
FLOWSERVE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
|
| | | | | | | |
(Amounts in thousands, except par value) | September 30, | | December 31, |
| 2017 | | 2016 |
ASSETS |
Current assets: | | | |
Cash and cash equivalents | $ | 502,143 |
| | $ | 367,162 |
|
Accounts receivable, net of allowance for doubtful accounts of $65,106 and $51,920, respectively | 851,246 |
| | 882,638 |
|
Inventories, net | 951,598 |
| | 897,690 |
|
Prepaid expenses and other | 134,023 |
| | 150,199 |
|
Total current assets | 2,439,010 |
| | 2,297,689 |
|
Property, plant and equipment, net of accumulated depreciation of $967,458 and $882,151, respectively | 673,555 |
| | 724,805 |
|
Goodwill | 1,211,544 |
| | 1,205,054 |
|
Deferred taxes | 93,638 |
| | 83,722 |
|
Other intangible assets, net | 212,425 |
| | 214,527 |
|
Other assets, net | 203,968 |
| | 183,126 |
|
Total assets | $ | 4,834,140 |
| | $ | 4,708,923 |
|
| | | |
LIABILITIES AND EQUITY |
Current liabilities: | | | |
Accounts payable | $ | 360,844 |
| | $ | 412,087 |
|
Accrued liabilities | 706,838 |
| | 680,986 |
|
Debt due within one year | 80,635 |
| | 85,365 |
|
Total current liabilities | 1,148,317 |
| | 1,178,438 |
|
Long-term debt due after one year | 1,506,057 |
| | 1,485,258 |
|
Retirement obligations and other liabilities | 412,137 |
| | 407,839 |
|
Shareholders’ equity: | | | |
Common shares, $1.25 par value | 220,991 |
| | 220,991 |
|
Shares authorized – 305,000 | | | |
Shares issued – 176,793 | | | |
Capital in excess of par value | 488,249 |
| | 491,848 |
|
Retained earnings | 3,634,750 |
| | 3,598,396 |
|
Treasury shares, at cost – 46,503 and 46,980 shares, respectively | (2,061,054 | ) | | (2,078,527 | ) |
Deferred compensation obligation | 6,256 |
| | 8,507 |
|
Accumulated other comprehensive loss | (540,504 | ) | | (624,788 | ) |
Total Flowserve Corporation shareholders’ equity | 1,748,688 |
| | 1,616,427 |
|
Noncontrolling interests | 18,941 |
| | 20,961 |
|
Total equity | 1,767,629 |
| | 1,637,388 |
|
Total liabilities and equity | $ | 4,834,140 |
| | $ | 4,708,923 |
|
| | | | | | | | | | | |
(Amounts in thousands, except par value) | June 30, | | December 31, |
| 2021 | | 2020 |
ASSETS |
Current assets: | | | |
Cash and cash equivalents | $ | 630,397 | | | $ | 1,095,274 | |
Accounts receivable, net of allowance for expected credit losses of $74,782 and $75,176, respectively | 729,551 | | | 753,462 | |
Contract assets, net of allowance for expected credit losses of $3,038 and $3,205, respectively | 262,231 | | | 277,734 | |
Inventories, net | 690,145 | | | 667,228 | |
| | | |
Prepaid expenses and other | 128,364 | | | 110,635 | |
Total current assets | 2,440,688 | | | 2,904,333 | |
Property, plant and equipment, net of accumulated depreciation of $1,107,765 and $1,093,348, respectively | 526,101 | | | 556,873 | |
Operating lease right-of-use assets, net | 204,075 | | | 208,125 | |
Goodwill | 1,213,103 | | | 1,224,886 | |
Deferred taxes | 46,904 | | | 30,538 | |
Other intangible assets, net | 160,653 | | | 168,496 | |
Other assets, net of allowance for expected credit losses of $67,770 and $67,842, respectively | 227,145 | | | 221,426 | |
Total assets | $ | 4,818,669 | | | $ | 5,314,677 | |
| | | |
LIABILITIES AND EQUITY |
Current liabilities: | | | |
Accounts payable | $ | 393,608 | | | $ | 440,199 | |
Accrued liabilities | 422,161 | | | 463,222 | |
Contract liabilities | 209,092 | | | 194,227 | |
Debt due within one year | 9,599 | | | 8,995 | |
| | | |
Operating lease liabilities | 35,256 | | | 34,990 | |
Total current liabilities | 1,069,716 | | | 1,141,633 | |
Long-term debt due after one year | 1,307,149 | | | 1,717,911 | |
Operating lease liabilities | 173,388 | | | 176,246 | |
Retirement obligations and other liabilities | 497,724 | | | 517,566 | |
Commitments and contingencies (See Note 11) | 0 | | 0 |
Shareholders’ equity: | | | |
Common shares, $1.25 par value | 220,991 | | | 220,991 | |
Shares authorized – 305,000 | | | |
Shares issued – 176,793 | | | |
Capital in excess of par value | 494,221 | | | 502,227 | |
Retained earnings | 3,677,117 | | | 3,670,543 | |
Treasury shares, at cost – 46,806 and 46,768 shares, respectively | (2,058,279) | | | (2,059,309) | |
Deferred compensation obligation | 7,077 | | | 6,164 | |
Accumulated other comprehensive loss | (600,143) | | | (609,625) | |
Total Flowserve Corporation shareholders’ equity | 1,740,984 | | | 1,730,991 | |
Noncontrolling interests | 29,708 | | | 30,330 | |
Total equity | 1,770,692 | | | 1,761,321 | |
Total liabilities and equity | $ | 4,818,669 | | | $ | 5,314,677 | |
See accompanying notes to condensed consolidated financial statements.
FLOWSERVE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total Flowserve Corporation Shareholders’ Equity | | | | |
| | | | | Capital in Excess of Par Value | | Retained Earnings | | | | | | Deferred Compensation Obligation | | Accumulated Other Comprehensive Income (Loss) | | | | Total Equity |
| Common Stock | | | | Treasury Stock | | | | Non- controlling Interests | |
| Shares | | Amount | | | | Shares | | Amount | | | | |
| (Amounts in thousands) |
Balance — April 1, 2021 | 176,793 | | | $ | 220,991 | | | $ | 488,906 | | | $ | 3,658,158 | | | (46,496) | | | $ | (2,045,937) | | | $ | 6,114 | | | $ | (616,200) | | | $ | 29,754 | | | $ | 1,741,786 | |
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Stock activity under stock plans | — | | | — | | | (1,397) | | | — | | | 1 | | | 107 | | | 963 | | | — | | | — | | | (327) | |
Stock-based compensation | — | | | — | | | 6,712 | | | — | | | — | | | — | | | — | | | — | | | — | | | 6,712 | |
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Net earnings | — | | | — | | | — | | | 45,354 | | | — | | | — | | | — | | | — | | | 2,390 | | | 47,744 | |
Cash dividends declared | — | | | — | | | — | | | (26,395) | | | — | | | — | | | — | | | — | | | — | | | (26,395) | |
Repurchases of common shares | — | | | — | | | — | | | — | | | (311) | | | (12,449) | | | — | | | — | | | — | | | (12,449) | |
Other comprehensive income (loss), net of tax | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 16,058 | | | 14 | | | 16,072 | |
| | | | | | | | | | | | | | | | | | | |
Other, net | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1) | | | (2,450) | | | (2,451) | |
Balance — June 30, 2021 | 176,793 | | | $ | 220,991 | | | $ | 494,221 | | | $ | 3,677,117 | | | (46,806) | | | $ | (2,058,279) | | | $ | 7,077 | | | $ | (600,143) | | | $ | 29,708 | | | $ | 1,770,692 | |
| | | | | | | | | | | | | | | | | | | |
Balance — April 1, 2020 | 176,793 | | | $ | 220,991 | | | $ | 497,721 | | | $ | 3,630,694 | | | (47,002) | | | $ | (2,069,063) | | | $ | 8,324 | | | $ | (674,829) | | | $ | 25,995 | | | $ | 1,639,833 | |
| | | | | | | | | | | | | | | | | | | |
Stock activity under stock plans | — | | | — | | | (2,733) | | | — | | | 129 | | | 4,761 | | | (2,288) | | | — | | | — | | | (260) | |
Stock-based compensation | — | | | — | | | 4,164 | | | — | | | — | | | — | | | — | | | — | | | — | | | 4,164 | |
| | | | | | | | | | | | | | | | | | | |
Net earnings | — | | | — | | | — | | | 6,132 | | | — | | | — | | | — | | | — | | | 2,142 | | | 8,274 | |
Cash dividends declared | — | | | — | | | — | | | (26,356) | | | — | | | — | | | — | | | — | | | — | | | (26,356) | |
| | | | | | | | | | | | | | | | | | | |
Other comprehensive income (loss), net of tax | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 20,913 | | | (63) | | | 20,850 | |
| | | | | | | | | | | | | | | | | | | |
Other, net | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (295) | | | (295) | |
Balance — June 30, 2020 | 176,793 | | | $ | 220,991 | | | $ | 499,152 | | | $ | 3,610,470 | | | (46,873) | | | $ | (2,064,302) | | | $ | 6,036 | | | $ | (653,916) | | | $ | 27,779 | | | $ | 1,646,210 | |
See accompanying notes to condensed consolidated financial statements. |
FLOWSERVE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total Flowserve Corporation Shareholders’ Equity | | | | |
| | | | | Capital in Excess of Par Value | | Retained Earnings | | | | | | Deferred Compensation Obligation | | Accumulated Other Comprehensive Income (Loss) | | | | Total Equity |
| Common Stock | | | | Treasury Stock | | | | Non- controlling Interests | |
| Shares | | Amount | | | | Shares | | Amount | | | | |
| (Amounts in thousands) |
Balance — January 1, 2021 | 176,793 | | | $ | 220,991 | | | $ | 502,227 | | | $ | 3,670,543 | | | (46,768) | | | $ | (2,059,309) | | | $ | 6,164�� | | | $ | (609,625) | | | $ | 30,330 | | | $ | 1,761,321 | |
| | | | | | | | | | | | | | | | | | | |
Stock activity under stock plans | — | | | — | | | (24,478) | | | — | | | 402 | | | 18,561 | | | 913 | | | — | | | — | | | (5,004) | |
Stock-based compensation | — | | | — | | | 16,472 | | | — | | | — | | | — | | | — | | | — | | | — | | | 16,472 | |
| | | | | | | | | | | | | | | | | | | |
Net earnings | — | | | — | | | — | | | 59,434 | | | — | | | — | | | — | | | — | | | 5,471 | | | 64,905 | |
Cash dividends declared | — | | | — | | | — | | | (52,860) | | | — | | | — | | | — | | | — | | | — | | | (52,860) | |
Repurchases of common shares | — | | | — | | | — | | | — | | | (440) | | | (17,531) | | | — | | | — | | | — | | | (17,531) | |
Other comprehensive income (loss), net of tax | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 9,482 | | | 162 | | | 9,644 | |
| | | | | | | | | | | | | | | | | | | |
Other, net | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (6,255) | | | (6,255) | |
Balance — June 30, 2021 | 176,793 | | | $ | 220,991 | | | $ | 494,221 | | | $ | 3,677,117 | | | (46,806) | | | $ | (2,058,279) | | | $ | 7,077 | | | $ | (600,143) | | | $ | 29,708 | | | $ | 1,770,692 | |
| | | | | | | | | | | | | | | | | | | |
Balance — January 1, 2020 | 176,793 | | | $ | 220,991 | | | $ | 501,045 | | | $ | 3,652,244 | | | (46,262) | | | $ | (2,051,583) | | | $ | 8,334 | | | $ | (584,292) | | | $ | 25,602 | | | $ | 1,772,341 | |
ASU No. 2016-13 - Measurement of Credit Losses on Financial Instruments (Topic 326) | — | | | — | | | — | | | (7,291) | | | — | | | — | | | — | | | — | | | — | | | (7,291) | |
Stock activity under stock plans | — | | | — | | | (20,368) | | | — | | | 446 | | | 19,393 | | | (2,298) | | | — | | | — | | | (3,273) | |
Stock-based compensation | — | | | — | | | 18,475 | | | — | | | — | | | — | | | — | | | — | | | — | | | 18,475 | |
| | | | | | | | | | | | | | | | | | | |
Net earnings | — | | | — | | | — | | | 18,254 | | | — | | | — | | | — | | | — | | | 4,243 | | | 22,497 | |
Cash dividends declared | — | | | — | | | — | | | (52,737) | | | — | | | — | | | — | | | — | | | — | | | (52,737) | |
Repurchases of common shares | — | | | — | | | — | | | — | | | (1,057) | | | (32,112) | | | — | | | — | | | — | | | (32,112) | |
Other comprehensive income (loss), net of tax | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (69,624) | | | 776 | | | (68,848) | |
| | | | | | | | | | | | | | | | | | | |
Other, net | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (2,842) | | | (2,842) | |
Balance — June 30, 2020 | 176,793 | | | $ | 220,991 | | | $ | 499,152 | | | $ | 3,610,470 | | | (46,873) | | | $ | (2,064,302) | | | $ | 6,036 | | | $ | (653,916) | | | $ | 27,779 | | | $ | 1,646,210 | |
See accompanying notes to condensed consolidated financial statements. |
FLOWSERVE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) | | | | | | | | | | | |
(Amounts in thousands) | Six Months Ended June 30, |
| 2021 | | 2020 |
Cash flows – Operating activities: | | | |
Net earnings, including noncontrolling interests | $ | 64,905 | | | $ | 22,497 | |
Adjustments to reconcile net earnings to net cash provided (used) by operating activities: | | | |
Depreciation | 44,491 | | | 41,711 | |
Amortization of intangible and other assets | 7,433 | | | 6,136 | |
Loss on extinguishment of debt | 7,610 | | | 0 | |
| | | |
| | | |
| | | |
| | | |
| | | |
Stock-based compensation | 16,472 | | | 18,475 | |
| | | |
Foreign currency, asset write downs and other non-cash adjustments | 12,460 | | | 10,970 | |
Change in assets and liabilities: | | | |
Accounts receivable, net | 14,285 | | | 858 | |
Inventories, net | (30,784) | | | (36,575) | |
Contract assets, net | 12,232 | | | (44,276) | |
Prepaid expenses and other assets, net | (16,187) | | | (3,956) | |
Accounts payable | (41,146) | | | (9,201) | |
Contract liabilities | 17,026 | | | 4,412 | |
Accrued liabilities and income taxes payable | (37,123) | | | (1,140) | |
Retirement obligations and other | (2,761) | | | 15,717 | |
| | | |
Net deferred taxes | (7,607) | | | (5,445) | |
Net cash flows provided (used) by operating activities | 61,306 | | | 20,183 | |
Cash flows – Investing activities: | | | |
Capital expenditures | (22,541) | | | (29,072) | |
| | | |
Proceeds from disposal of assets | 2,085 | | | 10,810 | |
Net affiliate investment activity | (3,384) | | | 0 | |
| | | |
| | | |
Net cash flows provided (used) by investing activities | (23,840) | | | (18,262) | |
Cash flows – Financing activities: | | | |
| | | |
Payments on long-term debt | (407,473) | | | 0 | |
| | | |
| | | |
| | | |
| | | |
Proceeds under other financing arrangements | 1,386 | | | 1,990 | |
Payments under other financing arrangements | (3,256) | | | (4,862) | |
Repurchases of common shares | (17,531) | | | (32,112) | |
Payments related to tax withholding for stock-based compensation | (5,777) | | | (3,850) | |
Payments of dividends | (52,168) | | | (52,054) | |
Other | (6,275) | | | (2,844) | |
Net cash flows provided (used) by financing activities | (491,094) | | | (93,732) | |
Effect of exchange rate changes on cash | (11,249) | | | (17,464) | |
Net change in cash and cash equivalents | (464,877) | | | (109,275) | |
Cash and cash equivalents at beginning of period | 1,095,274 | | | 670,980 | |
Cash and cash equivalents at end of period | $ | 630,397 | | | $ | 561,705 | |
|
| | | | | | | |
(Amounts in thousands) | Nine Months Ended September 30, |
| 2017 | | 2016 |
Cash flows – Operating activities: | | | |
Net earnings, including noncontrolling interests | $ | 110,216 |
| | $ | 73,620 |
|
Adjustments to reconcile net earnings to net cash provided (used) by operating activities: | | | |
Depreciation | 75,177 |
| | 74,875 |
|
Amortization of intangible and other assets | 12,767 |
| | 12,424 |
|
(Gain) loss on dispositions of businesses | (141,158 | ) | | 7,664 |
|
Stock-based compensation | 20,291 |
| | 29,966 |
|
Latin America accounts receivable reserve | — |
| | 73,451 |
|
Foreign currency, asset impairment and other non-cash adjustments | 24,696 |
| | (1,037 | ) |
Change in assets and liabilities: | | | |
Accounts receivable, net | 63,835 |
| | 69,818 |
|
Inventories, net | (20,355 | ) | | (31,462 | ) |
Prepaid expenses and other | 43,546 |
| | (58,743 | ) |
Other assets, net | (21,090 | ) | | (19,512 | ) |
Accounts payable | (68,012 | ) | | (98,782 | ) |
Accrued liabilities and income taxes payable | (6,702 | ) | | (82,318 | ) |
Retirement obligations and other | (18,720 | ) | | 7,821 |
|
Net deferred taxes | (2,131 | ) | | 13,155 |
|
Net cash flows provided by operating activities | 72,360 |
| | 70,940 |
|
Cash flows – Investing activities: | | | |
Capital expenditures | (40,620 | ) | | (64,475 | ) |
Proceeds from disposal of assets | 2,977 |
| | 632 |
|
Proceeds from (payments for) dispositions of businesses | 208,775 |
| | (5,064 | ) |
Net cash flows provided (used) by investing activities | 171,132 |
| | (68,907 | ) |
Cash flows – Financing activities: | | | |
Payments on long-term debt | (45,000 | ) | | (45,000 | ) |
Proceeds under other financing arrangements | 6,234 |
| | 24,701 |
|
Payments under other financing arrangements | (12,560 | ) | | (12,060 | ) |
Payments related to tax withholding for stock-based compensation | (6,287 | ) | | (10,267 | ) |
Payments of dividends | (74,412 | ) | | (72,960 | ) |
Other | (4,189 | ) | | 1,325 |
|
Net cash flows used by financing activities | (136,214 | ) | | (114,261 | ) |
Effect of exchange rate changes on cash | 27,703 |
| | 6,654 |
|
Net change in cash and cash equivalents | 134,981 |
| | (105,574 | ) |
Cash and cash equivalents at beginning of period | 367,162 |
| | 366,444 |
|
Cash and cash equivalents at end of period | $ | 502,143 |
| | $ | 260,870 |
|
See accompanying notes to condensed consolidated financial statements.
FLOWSERVE CORPORATION
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| |
1. | Basis of Presentation and Accounting Policies |
1.Basis of Presentation and Accounting Policies
Basis of Presentation
The accompanying condensed consolidated balance sheet as of SeptemberJune 30, 2017,2021, the related condensed consolidated statements of income and comprehensive income (loss) for the three and ninesix months ended SeptemberJune 30, 20172021 and 2016,2020, the condensed consolidated statements of shareholders' equity for the three and six months ended June 30, 2021 and 2020 and the condensed consolidated statements of cash flows for the ninesix months ended SeptemberJune 30, 20172021 and 2016,2020 of Flowserve Corporation are unaudited. In management’s opinion, all adjustments comprising normal recurring adjustments necessary for fair statement of such condensed consolidated financial statements have been made. Where applicable, prior period information has been updated to conform to current year presentation.
The accompanying condensed consolidated financial statements and notes in this Quarterly Report on Form 10-Q for the quarterly period ended SeptemberJune 30, 20172021 ("Quarterly Report") are presented as permitted by Regulation S-X and do not contain certain information included in our annual financial statements and notes thereto. Accordingly, the accompanying condensed consolidated financial information should be read in conjunction with the audited consolidated financial statements presented in our Annual Report on Form 10-K/A10-K for the year ended December 31, 20162020 ("20162020 Annual Report").
Revision to Previously Reported Financial Information –As- During the first quarter of 2021, as previously disclosed, in our Quarterly Report on Form 10-Q forwe identified an accounting error involving foreign currency transactions beginning with the quarterly periodfirst quarter of 2020 through the year ended June 30, 2017,December 31, 2020. These adjustments increased retirement obligations and other liabilities by $1.5 million, retained earnings by $14.0 million and accumulated other comprehensive loss by $15.5 million as of December 31, 2020.
In addition, as previously disclosed, during the third quarter of 2020, we identified accounting errors focused mainly at tworelated to the recognition of our non-U.S. sites ina liability for unasserted asbestos claims. The adjustments primarily related to an incurred but not reported ("IBNR") liability associated with unasserted asbestos claims, but also included adjustments related to the inventory, accounts receivable, costassociated receivables for expected insurance proceeds for asbestos settlement and defense costs from insurance coverage and the recognition as an expense the related legal fees that were previously estimated to be recoverable from insurance carriers for which coverage is not currently sufficient following the recognition of sales and selling, general and administrative balancesthe IBNR for prior periods beginning with the year ended December 31, 2014 through the firstsecond quarter of 2017. 2020 and to correct certain other previously identified immaterial errors.
We have assessed thesethe above described errors, individually and in the aggregate, and concluded that they were not material to any prior annual or interim period. However, to facilitate comparisons among periods we revised our previously issued audited consolidated financial information which is included in our 2016 Annual Report and unaudited condensed consolidated financial information for the interim periods included in our Form 10-Q/A and Form 10-Q for the quartersperiod ended March 31, 2017 and June 30, 2017, respectively. We also corrected2020 or any previous period. The June 30, 2020, balances, as presented herein, have been revised. Additionally, the timing of immaterial previously recorded out-of-period adjustments and reflected themremaining periods in 2020 will be revised the revised prior periodnext time such financial statements whereare filed as applicable. SeeRefer to Note 2 for more information.
Brazil Long-Lived Asset Impairment –Ina detailed discussion related to the second quarter of 2017, due to continued capital spending declines in the Brazilian oil and gas market and economic and political circumstances, including the indictmentimpact of the former president, the decision was made to scale back certainrevision as of our operations in Brazil. As a result in the second quarter of 2017, we tested our related long-lived assets, which primarily consist of property, plant and equipment, for recoverability and recorded a $26.0 million impairment charge to selling, general and administrative expense ("SG&A") within our Engineered Product Division ("EPD") segment.
Venezuela – Our operations in Venezuela primarily consist of a service center that performs service and repair activities. Our Venezuelan subsidiary's sales for the three and ninesix months ended SeptemberJune 30, 2017 represented less than 0.5%2020 and the impact to future periods in 2020 which will be revised in future filings.
Coronavirus Pandemic ("COVID-19") and Oil and Gas Market - During the first six months of consolidated sales2021, we continue to be challenged by macroeconomics and its assets at September 30, 2017 represented less than 0.5%global economic impacts based on the disruption and uncertainties caused by COVID-19. As a result of total consolidated assets. Assets primarily consisted of United States ("U.S.") dollar-denominated monetary assets and bolivar-denominated non-monetary assets at September 30, 2017. In addition, certainthe COVID-19 pandemic’s effect on oil prices, many of our operationslarge customers reduced capital expenditures and budgets in other countries sell equipment and parts that are typically denominated in U.S. dollars directly2020. To date, customer spending has yet to Venezuelan customers. In the third quarterreturn to pre-pandemic levels.
The preparation of 2016 we recorded a charge of $73.5 million to SG&A to fully reserve for those potentially uncollectible accounts receivable (classified as other assets, net on theour condensed consolidated balance sheet) and a charge to cost of sales ("COS") of $1.9 million to reserve for related net inventory exposures. We continue to pursue payments from our Venezuelan customer.
Valuation of Goodwill, Indefinite-Lived Intangible Assets and Other Long-Lived Assets – As discussed in Note 1 to our consolidated financial statements included inrequires us to make estimates, judgments and assumptions that may affect the reported amounts of assets, liabilities, equity, revenues and expenses and related disclosure of contingent assets and liabilities. We evaluate our 2016 Annual Report,estimates, judgments and methodologies on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe are reasonable, the results of which form the basis for making judgments about the carrying values of assets, liabilities and equity and the amount of revenues and expenses. The full extent to which the COVID-19 pandemic directly or indirectly impacts our business, results of operations and financial condition, including sales, expenses, our allowance for expected credit losses, stock based compensation, the carrying value of our goodwill and indefinite-lived intangible
other long-lived assets, is testedfinancial assets, and valuation allowances for impairmenttax assets, will depend on future developments that are highly uncertain, including as a result of December 31 each yearnew information that may emerge concerning COVID-19 and the actions taken to contain it or whenever events or circumstances indicate such assetstreat it, as well as the economic impact on local, regional, national and international customers, suppliers and markets. We have made estimates of the impact of COVID-19 within our financial statements and there may be impaired.
We did not record an impairment of goodwill in 2016, 2015 or 2014; however at December 31, 2016 the estimated fair value of our Engineered Product Operations ("EPO") and Industrial Product Division ("IPD") reporting units reduced significantly duechanges to broad-based capital spending declines and heightened pricing pressure experienced in the oil and gas markets which are anticipated to continuethose estimates in the near to mid-term. Although we concluded that there is no impairment on the goodwill associated with our EPO and IPD reporting unitsmid-term as of December 31, 2016, we will continue to closely monitor their performance and related market conditions for future indicators of potential impairment and reassess accordingly.new information becomes available. Actual results may differ from these estimates.
Accounting Policies
Significant accounting policies, for which no significant changes have occurred in the nine months ended September 30, 2017, are detailed in Note 1 to our consolidated financial statements included in our 2016 Annual Report.
Accounting Developments
Pronouncements Implemented
In July 2015,January 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2015-11, "Inventory2020-01, "Investments—Equity Securities (Topic 330)321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815): SimplifyingClarifying the MeasurementInteractions between Topics 321, 323 and 815." The amendments of Inventory.the ASU addresses accounting for the transition into and out of the equity method and measurement of certain purchased options and forward contracts to acquire investments. The ASU is effective for annual periods beginning after December 15, 2020 and the amendments should be applied retrospectively to all periods presented. The adoption of this ASU did not have an impact on our consolidated financial condition, results of operations or net cash flows.
In March of 2020, the FASB issued ASU No. 2020-04, "Reference Rate Reform (Topic 848): Facilitation of The Effects of Reference Rate Reform on Financial Reporting." The ASU updates represent changesprovides guidance designed to simplifyenable the process for migrating away from reference rates such as the London Interbank Offered Rate ("LIBOR") and others to new reference rates. Further, the amendments of the ASU provides optional expedients and exceptions for applying U.S. GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. The amendments are effective as of March 12, 2020 through December 31, 2022 and may be applied to contract modifications and hedging relationships from the beginning of an interim period that includes or is subsequent measurement of inventory. Previous to March 12, 2020. At this time, we do not have hedging relationships that reference LIBOR or another reference rate expected to be discontinued and therefore, have not applied the issuancepractical expedients and exceptions as required by the ASU. As referenced in Note 7 of this ASU, ASC 330 required that an entity measure inventory atQuarterly Report, the lower of cost or market. The amendments of ASU 2015-11 updates that “market” requirement to “net realizable value,” which is defined by the ASU as the estimated selling pricesCompany’s Senior Credit Facility agreement includes a transition clause in the ordinary courseevent LIBOR is discontinued, as such, we do not expect the transition of business, less reasonably predictable costsLIBOR to have a material impact on our consolidated financial statements. We do not expect the application of completion, disposal,these expedients and transportation. Our adoption of ASU No. 2015-11 effective January 1, 2017 did notexceptions to have an impact on our consolidated financial condition and results of operations.
In March 2016,October 2020, the FASB issued ASU No. 2016-09, "Compensation - Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting." The ASU affects the accounting for employee share-based payment transactions as it relates to accounting for income taxes, accounting for forfeitures, and statutory tax withholding requirements. We adopted the provisions of ASU 2016-09 as of January 1, 2017 using the modified retrospective approach. The adoption resulted in the recognition of approximately $1 million of tax expense in our provision of income taxes and an approximately $3 million one-time, cumulative adjustment to beginning retained earnings related2020-10, "Codification Improvements: Amendments to the change in our accounting policy for estimated forfeitures and share cancellations. In addition, in our statements of cash flows we reclassified cash outflows for employee taxes paid from operating to financing and elected to reclassify cash impacts due to excess tax deficiencies and benefits from financing to operating, which resulted in a net reclassification of approximately $10 million of cash flows used from operating to financing for the nine months ended September 30, 2016.
Pronouncements Not Yet Implemented
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)" which supersedes most of the revenue recognition requirements in "Revenue Recognition (Topic 605)." The standard is principle-based and provides a five-step model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue when (or as) it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. Companies are permitted to adopt the new standard using one of two transition methods. Under the full retrospective method, the requirements of the new standard are applied to contracts for each prior reporting period presented and the cumulative effect of applying the standard is recognized in the earliest period presented. Under the modified retrospective method, the requirements of the new standard are applied to contracts that are open as of January 1, 2018, the required date of adoption, and the cumulative effect of applying the standard is recognized as an adjustment to beginning retained earnings in that same year. The standard also includes significantly expanded disclosure requirements for revenue. Since 2014, the FASB has issued several updates to Topic 606.
We are currently evaluating the impact of ASU No. 2014-09 and all related ASU's on our consolidated financial condition and results of operations. We plan to adopt the new revenue guidance effective January 1, 2018 using the modified retrospective method for transition, applying the guidance to those contracts which were not completed as of that date. In 2015, we established a cross-functional implementation team consisting of representatives from across all of our reportable segments to begin the process of analyzing the impact of the new standard on our contracts. We have determined the applicability of the key factors of the five step model and developed a framework of accounting policies and practices to meet the requirements of the of the new standard. The results of our evaluation indicate that one of the changes upon adoption may be potentially increased "over-time" ("percentage of completion") revenue recognition. Historically, revenue recognized under the percentage of completion method has been less than 5% to 7% of our consolidated sales. The adoption of the new standard could substantially increase this range depending on the terms and conditions of the contracts in our backlog at January 1, 2018 and future contracts. We also anticipate changes to the consolidated balance sheet related to accounts receivable, inventory, contract assets and contract liabilities. We expect to further our assessment on the financial impact on our consolidated financial condition and results of operations and to align our business processes, systems and controls to support compliance with the standard during the remainder of 2017. We will continue our evaluation of ASU 2014-09 as well as new or emerging interpretations of the standard through the date of adoption.
In January 2016, the FASB issued ASU No. 2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities." The ASU requires entities to measure equity investments that do not result in consolidation and are not accounted for under the equity method at fair value with changes in fair value recognized in net income. The ASU also requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. The requirement to disclose the method(s) and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost on the balance sheet has been eliminated by this ASU. This ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. We are currently evaluating the impact of ASU No. 2016-01 on our consolidated financial condition and results of operations.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)”. The ASU requires that organizations that lease assets recognize assets and liabilities on the balance sheet for the rights and obligations created by those leases. The ASU will affect the presentation of lease related expenses on the income statement and statement of cash flows and will increase the required disclosures related to leases. This ASU is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years with early adoption permitted. We are currently evaluating the impact of ASU No. 2016-02 on our consolidated financial condition and results of operations. Although we are continuing to evaluate, upon initial qualitative evaluation, we believe a key change upon adoption will be the balance sheet recognition of leased assets and liabilities. Based on our qualitative evaluation to date, we believe that any changes in income statement recognition will not be material.
In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments.Accounting Standards Codification." The amendments in this ASU replace the current incurred loss impairment methodology with a methodology that reflects expected credit lossesdo not change GAAP and, requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Wetherefore, are currently evaluating the impact of ASU No. 2016-13 on our consolidated financial condition and results of operations.
In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments - A consensus of the FASB Emerging Issues Task Force.” The update was issued with the objective of reducing the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230 and other topics. This ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The adoption of ASU No. 2016-15 is not expected to haveresult in a material impact on our consolidatedsignificant change in practice. Rather, the amendments are intended to improve codification guidance and disclosure requirements in Company's financial conditionstatements and results of operations.
In October 2016,notes to the FASB issued ASU No. 2016-16, "Income Taxes (Topic 740) Intra-Entity Transfers of Assets Other Than Inventory."financial statements. The ASU guidance requires the recognition of the income tax consequences of an intercompany asset transfer, other than transfers of inventory, when the transfer occurs. For intercompany transfers of inventory, the income tax effects will continue to be deferred until the inventory has been sold to a third party. The ASU is effective for reporting periods beginning after December 15, 2017, with early adoption permitted. We are currently evaluating the impact of ASU No. 2016-16 on our consolidated financial condition and results of operations.
In November 2016, the FASB issued ASU No. 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash." The amendments in this ASU require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The ASU is effective for reporting periods beginning after December 15, 2017, including interim periods with those fiscal years. The adoption of ASU No. 2016-18 is not expected to have a material impact on our consolidated financial condition and results of operations.
In January 2017, the FASB issued ASU No. 2017-01, "Business Combinations (Topic 805): "Clarifying the Definition of a Business." The ASU clarifies the definition of a business and provides guidance on evaluating as to whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition clarification as outlined in this ASU affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The amendments of the ASU are effective for annual periods beginning after December 15, 2017, including interim2020 and the amendments should be applied retrospectively to all periods within those annual periods.presented. The adoption of this ASU No. 2017-01 isdid not expected to have a materialan impact on our consolidated financial condition, and results of operations.operations or net cash flows.
2.Revision to Previously Reported Financial Information
During the first quarter of 2021, we identified an accounting error involving foreign currency transactions beginning with the first quarter of 2020 though the year ended December 31, 2020. These adjustments increased retirement obligations and other liabilities by $1.5 million, retained earnings by $14.0 million and accumulated other comprehensive loss by $15.5 million as of December 31, 2020.
In January 2017, the FASB issued ASU No. 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifyingthird quarter of 2020, we identified accounting errors related to the Test for Goodwill Impairment." The amendments in this ASU allow companies to apply a one-step quantitative test and record the amount of goodwill impairment as the excessrecognition of a reporting unit’s carrying amount over its fair value, notliability for unasserted asbestos claims. The adjustments primarily relate to exceed the total amount of goodwill allocatedan IBNR associated with unasserted asbestos claims, but also include adjustments related to the reporting unit. The amendmentsassociated receivables for expected insurance proceeds for asbestos settlement and defense costs from insurance coverage and the recognition as an expense the related legal fees that were previously estimated to be recoverable from insurance carriers for which coverage is not currently sufficient following the recognition of the ASU are effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We are currently evaluating the impact of ASU No. 2017-04 on our consolidated financial conditionIBNR and results of operations.
In February 2017, the FASB issued ASU No. 2017-05, "Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets." The FASB issued this ASU to clarify the scope of subtopic 610-20, which the FASB had failed to define in its issuance of ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)." ASU No. 2017-05 will be effective concurrently with ASU No. 2014-09. Similarly to ASU 2014-09, we are continuing our evaluation of ASU No. 2017-05 to determine the impact on our consolidated financial condition and results of operations.
On March 10, 2017, the FASB issued ASU No. 2017-07, "Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost." The amendments of this ASU provide additional guidance intended to improve the presentation of net benefit costs, pension costs and net periodic postretirement costs.
correct certain other previously identified immaterial misstatements.
The amendments in this ASU must be applied to annual reporting periods beginning after December 15, 2017, and to interim periods in 2018. Early adoption of the standard is permitted. We are currently evaluatingfollowing tables present the impact of ASU No. 2017- 07 on our consolidated financial condition and results of operations.
On May 10, 2017, the FASB issued ASU No. 2017-09, "Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting." The amendments in this ASU provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The amendments of the ASU must be applied to annual reporting periods beginning after December 15, 2017, including interim periods within those annual periods. Early adoption of the standard is permitted. We are currently evaluating the impact of ASU No. 2017-09 on our consolidated financial condition and results of operations.
On July 13, 2017, the FASB issued ASU No. 2017-11, “Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatory Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatory Redeemable Noncontrolling Interests with a Scope Exception.” The ASU amends guidance in FASB Accounting Standards Codification ("ASC") 260, Earnings Per Share, FASB ASC 480, Distinguishing Liabilities from Equity, and FASB ASC 815, Derivatives and Hedging. The amendments in Part I of this ASU change the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. The amendments in Part II of the ASU re-characterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the codification, to a scope exception. The amendments in this ASU must be applied to annual reporting periods beginning after December 15, 2018. Early adoption is permitted. We are currently evaluating the impact of ASU No. 2017-11 on our consolidated financial condition and results of operations.
On August 28, 2017, the FASB issued ASU No. 2017-12, "Derivatives and Hedging (Topic 815): Targeted improvements of Accounting For Hedging Activities." The purpose of this ASU is to better align a company’s risk management activities and financial reporting for hedging relationships. Additionally, the ASU simplifies the hedge accounting requirements and improve the disclosures of hedging arrangements. The effective date is fiscal year 2020, with early adoption permitted. We are currently evaluating the impact of ASU No. 2017-12 on our consolidated financial condition and results of operations.
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2. | Revision to Previously Reported Financial Information |
As described in Note 1, we revised the annual and quarterly periods prior to June 30, 2017. The following table presents the effect of the prior period revisions on the affected line items ofon our condensed consolidated financial statements of income for the three and nine months ended September 30, 2016:
|
| | | | | | | | | | | |
(Amounts in thousands, except per share data) | Three Months Ended September 30, 2016 |
| As Reported | | Adjustments | | As Revised |
Sales | $ | 943,334 |
| | $ | 2,605 |
| | $ | 945,939 |
|
Cost of sales (1) | (677,891 | ) | | 9,931 |
| | (667,960 | ) |
Gross profit | 265,443 |
| | 12,536 |
| | 277,979 |
|
Selling, general and administrative expense (2) | (271,643 | ) | | (9,618 | ) | | (281,261 | ) |
Operating (loss) income | (2,806 | ) | | 2,918 |
| | 112 |
|
Loss before income taxes | (15,124 | ) | | 2,918 |
| | (12,206 | ) |
Provision for income taxes (3) | (4,996 | ) | | 2,169 |
| | (2,827 | ) |
Net loss, including noncontrolling interests | (20,120 | ) | | 5,087 |
| | (15,033 | ) |
Net loss attributable to Flowserve Corporation | $ | (20,928 | ) | | $ | 5,087 |
| | $ | (15,841 | ) |
Net loss per share attributable to Flowserve Corporation common shareholders: | | | | | |
Basic | $ | (0.16 | ) | | $ | 0.04 |
| | $ | (0.12 | ) |
Diluted | (0.16 | ) | | 0.04 |
| | (0.12 | ) |
(1) The costperiods indicated for the correction of sales adjustments primarily relate to corrections of previously recorded out of period including an aggregate $8.7 million associated with our EPD reporting segment to write down inventory in Brazil.
(2) The selling, general and administrative expense adjustments primarily relate to receivables from our primary Venezuelan customer at one non-U.S. manufacturing site in our EPD segment of $(10.3) million. These receivables should have been includedthe accounting error involving foreign currency transactions identified in the charge that we recordedfirst quarter of 2021, the accounting errors related to the recognition of a liability for unasserted asbestos claims identified in the third quarter of 20162020, and other immaterial misstatements previously identified:
| | | | | | | | | | | | | | | | | |
| June 30, 2020 |
(Amounts in thousands) | As Reported | | Adjustments | | As Revised |
|
| | | | | |
| | | | | |
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Contract assets, net of allowance for expected credit losses | $ | 309,149 | | | $ | 47 | | | $ | 309,196 | |
| | | | | |
| | | | | |
| | | | | |
Total current assets | 2,430,555 | | | 47 | | | 2,430,602 | |
Property, plant and equipment, net of accumulated depreciation(1) | 541,768 | | | 5,703 | | | 547,471 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Other assets, net of allowance for expected credit losses(2) | 218,604 | | | 16,926 | | | 235,530 | |
Total assets | 4,755,702 | | | 22,676 | | | 4,778,378 | |
|
| | | | | |
| | | | | |
Accrued liabilities(3) | 401,041 | | | (4,029) | | | 397,012 | |
Contract liabilities(4) | 214,135 | | | 5,498 | | | 219,633 | |
Debt due within one year | 9,058 | | | 156 | | | 9,214 | |
| | | | | |
| | | | | |
Total current liabilities | 1,088,738 | | | 1,625 | | | 1,090,363 | |
Long-term debt due after one year(1) | 1,367,478 | | | 5,646 | | | 1,373,124 | |
| | | | | |
Retirement obligations and other liabilities(5) | $ | 470,400 | | | $ | 59,546 | | | $ | 529,946 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Retained earnings(6) | 3,643,868 | | | (33,398) | | | 3,610,470 | |
| | | | | |
| | | | | |
Accumulated other comprehensive loss | (643,173) | | | (10,743) | | | (653,916) | |
Total Flowserve Corporation shareholders’ equity | 1,662,572 | | | (44,141) | | | 1,618,431 | |
| | | | | |
Total equity | 1,690,351 | | | (44,141) | | | 1,646,210 | |
Total liabilities and equity | $ | 4,755,702 | | | $ | 22,676 | | | $ | 4,778,378 | |
______________________________________(1) Adjustment relates to fully reserve allright-of-use (“ROU”) asset and lease liability for an operating lease.
(2) Adjustment relates to the potentially uncollectible receivables.associated receivables for expected insurance proceeds for asbestos settlements and defense costs.
(3) The provision for income taxes adjustment(3) Adjustment primarily relates to non-restructuring realignment charges associated with workforce reductions in our Realignment Programs ("2020 Realignment Program"). Refer to Note 17 for further discussion of this program.
(4) Adjustment relates to one of our sites for correction in contract position caused by errors in estimated costs under the taxover time revenue recognition model.
(5) Adjustment primarily relates to IBNR reserves associated with unasserted asbestos claims.
(6) The adjustments to retained earnings are the cumulative effect of the adjustment describedimmaterial errors that were corrected in footnote (2) above.
prior periods.
| | | | | | | | | | Three Months Ended June 30, 2020 |
(Amounts in thousands, except per share data) | Nine Months Ended September 30, 2016 | (Amounts in thousands, except per share data) | As Reported | | Adjustments | | As Revised |
Sales | | Sales | $ | 924,965 | | | $ | 47 | | | $ | 925,012 | |
Cost of sales(1) | | Cost of sales(1) | (657,805) | | | 2,500 | | | (655,305) | |
Gross profit | | Gross profit | 267,160 | | | 2,547 | | | 269,707 | |
Selling, general and administrative expense(2) | | Selling, general and administrative expense(2) | (227,358) | | | (1,985) | | | (229,343) | |
| As Reported | | Adjustments | | As Revised | |
Sales | $ | 2,916,814 |
| | $ | 2,739 |
| | $ | 2,919,553 |
| |
Cost of sales (1) | (2,018,646 | ) | | 2,891 |
| | (2,015,755 | ) | |
Gross profit | 898,168 |
| | 5,630 |
| | 903,798 |
| |
Selling, general and administrative expense (2) | (737,083 | ) | | (10,430 | ) | | (747,513 | ) | |
| Operating income | 169,607 |
| | (4,800 | ) | | 164,807 |
| Operating income | 42,888 | | | 564 | | | 43,452 | |
Other income (expense), net | 2,091 |
| | (1,021 | ) | | 1,070 |
| |
| Other income (expense), net(3) | | Other income (expense), net(3) | (14,941) | | | (3,966) | | | (18,907) | |
Earnings before income taxes | 128,959 |
| | (5,821 | ) | | 123,138 |
| Earnings before income taxes | 16,196 | | | (3,437) | | | 12,759 | |
Provision for income taxes (3) | (47,809 | ) | | (1,709 | ) | | (49,518 | ) | |
Provision for income taxes | | Provision for income taxes | (5,409) | | | 924 | | | (4,485) | |
Net earnings, including noncontrolling interests | 81,150 |
| | (7,530 | ) | | 73,620 |
| Net earnings, including noncontrolling interests | 10,787 | | | (2,513) | | | 8,274 | |
Net earnings attributable to Flowserve Corporation | $ | 79,928 |
| | $ | (7,530 | ) | | $ | 72,398 |
| |
Net earnings per share attributable to Flowserve Corporation common shareholders: | | | | | | |
| Net earnings (loss) attributable to Flowserve Corporation | | Net earnings (loss) attributable to Flowserve Corporation | $ | 8,645 | | | $ | (2,513) | | | $ | 6,132 | |
Net earnings (loss) per share attributable to Flowserve Corporation common shareholders: | | Net earnings (loss) per share attributable to Flowserve Corporation common shareholders: | | | | |
Basic | $ | 0.61 |
| | $ | (0.05 | ) | | $ | 0.56 |
| Basic | $ | 0.07 | | | $ | (0.02) | | | $ | 0.05 | |
Diluted | 0.61 |
| | (0.06 | ) | | 0.55 |
| Diluted | 0.07 | | | (0.02) | | | 0.05 | |
(1) The cost of sales adjustmentsAdjustment primarily relaterelates to corrections of previously recorded out of period including an aggregate $4.6 millionnon-restructuring realignment charges associated with workforce reductions in our EPD reporting segment to write down inventory in Brazil.2020 Realignment Program.
(2) Adjustment primarily relates to asbestos settlement and defense costs for related legal fees.
(3) Adjustment relates to the accounting error involving foreign currency transactions.
| | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2020 |
(Amounts in thousands) | As Reported | | Adjustments | | As Revised |
Net earnings, including noncontrolling interests(1) | $ | 10,787 | | | $ | (2,513) | | | $ | 8,274 | |
Other comprehensive income (loss): | | | | | |
Foreign currency translation adjustments, net of taxes(2) | 15,084 | | | 3,964 | | | 19,048 | |
| | | | | |
| | | | | |
Other comprehensive income (loss) | 16,886 | | | 3,964 | | | 20,850 | |
Comprehensive income (loss), including noncontrolling interests | 27,673 | | | 1,451 | | | 29,124 | |
| | | | | |
Comprehensive income (loss) attributable to Flowserve Corporation | $ | 25,594 | | | $ | 1,451 | | | $ | 27,045 | |
(1) Adjustment relates to cumulative effect of the accounting errors that were corrected in the periods, as outlined above.
(2) Adjustment relates to the accounting error involving foreign currency transactions.
| | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2020 |
(Amounts in thousands, except per share data) | As Reported | | Adjustments | | As Revised |
Sales | $ | 1,819,422 | | | $ | (896) | | | $ | 1,818,526 | |
Cost of sales(1) | (1,286,285) | | | 3,925 | | | (1,282,360) | |
Gross profit | 533,137 | | | 3,029 | | | 536,166 | |
Selling, general and administrative expense(2) | (470,980) | | | (3,814) | | | (474,794) | |
| | | | | |
| | | | | |
Operating income | 68,440 | | | (785) | | | 67,655 | |
Interest expense | (25,863) | | | (35) | | | (25,898) | |
| | | | | |
| | | | | |
Other income (expense), net(3) | 8,521 | | | 10,774 | | | 19,295 | |
Earnings before income taxes | 53,996 | | | 9,954 | | | 63,950 | |
Provision for income taxes | (41,719) | | | 266 | | | (41,453) | |
Net earnings, including noncontrolling interests | 12,277 | | | 10,220 | | | 22,497 | |
| | | | | |
Net earnings (loss) attributable to Flowserve Corporation | $ | 8,035 | | | $ | 10,219 | | | $ | 18,254 | |
Net earnings (loss) per share attributable to Flowserve Corporation common shareholders: | | | | | |
Basic | $ | 0.06 | | | $ | 0.08 | | | $ | 0.14 | |
Diluted | 0.06 | | | 0.08 | | | 0.14 | |
(1) Adjustment primarily relates to non-restructuring realignment charges associated with workforce reductions in our 2020 Realignment Program.
(2) Adjustment primarily relates to asbestos settlement and defense costs for related legal fees.
(3) Adjustment relates to the accounting error involving foreign currency transactions.
| | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2020 |
(Amounts in thousands) | As Reported | | Adjustments | | As Revised |
Net earnings, including noncontrolling interests(1) | $ | 12,277 | | | $ | 10,220 | | | $ | 22,497 | |
Other comprehensive income (loss): | | | | | |
Foreign currency translation adjustments, net of taxes(2) | (66,269) | | | (10,744) | | | (77,013) | |
| | | | | |
| | | | | |
Other comprehensive income (loss) | (58,104) | | | (10,744) | | | (68,848) | |
Comprehensive income (loss), including noncontrolling interests | (45,827) | | | (524) | | | (46,351) | |
| | | | | |
Comprehensive income (loss) attributable to Flowserve Corporation | $ | (50,845) | | | $ | (524) | | | $ | (51,369) | |
(1) Adjustment relates to cumulative effect of the accounting errors that were corrected in the periods, as outlined above.
(2) Adjustment relates to the accounting error involving foreign currency transactions.
The selling, general and administrative expense adjustments primarilyfollowing tables present the impact to affected line items on our condensed consolidated financial statements for the periods indicated for the correction of the accounting error involving foreign currency transactions identified in the first quarter of 2021:
| | | | | | | | | | | | | | | | | |
| September 30, 2020 |
(Amounts in thousands) | As Reported | | Adjustments(1) | | As Revised |
|
| | | | | |
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Retirement obligations and other liabilities | $ | 541,721 | | | $ | 1,500 | | | $ | 543,221 | |
| | | | | |
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| | | | | |
| | | | | |
| | | | | |
| | | | | |
Retained earnings | 3,625,291 | | | 14,936 | | | 3,640,227 | |
| | | | | |
| | | | | |
Accumulated other comprehensive loss | (618,856) | | | (16,436) | | | (635,292) | |
Total Flowserve Corporation shareholders’ equity | 1,673,421 | | | (1,500) | | | 1,671,921 | |
| | | | | |
Total equity | 1,703,843 | | | (1,500) | | | 1,702,343 | |
| | | | | |
(1) Adjustments relate to the matteraccounting error involving foreign currency transactions.
| | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2020 |
(Amounts in thousands, except per share data) | As Reported | | Adjustments(1) | | As Revised |
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Other income (expense), net | $ | (963) | | | $ | 5,636 | | | $ | 4,673 | |
Earnings before income taxes | 72,322 | | | 5,636 | | | 77,958 | |
Provision for income taxes | (18,672) | | | (524) | | | (19,196) | |
Net earnings, including noncontrolling interests | 53,650 | | | 5,112 | | | 58,762 | |
| | | | | |
Net earnings attributable to Flowserve Corporation | $ | 51,003 | | | $ | 5,112 | | | $ | 56,115 | |
Net earnings per share attributable to Flowserve Corporation common shareholders: | | | | | |
Basic | $ | 0.39 | | | $ | 0.04 | | | $ | 0.43 | |
Diluted | 0.39 | | | 0.04 | | | 0.43 | |
(1) Adjustments relate to the accounting error involving foreign currency transactions.
| | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2020 |
(Amounts in thousands) | As Reported | | Adjustments(1) | | As Revised |
Net earnings, including noncontrolling interests | $ | 53,650 | | | $ | 5,112 | | | $ | 58,762 | |
Other comprehensive income (loss): | | | | | |
Foreign currency translation adjustments, net of taxes | 25,204 | | | (5,649) | | | 19,555 | |
| | | | | |
| | | | | |
Other comprehensive income (loss) | 24,269 | | | (5,649) | | | 18,620 | |
Comprehensive income (loss), including noncontrolling interests | 77,919 | | | (537) | | | 77,382 | |
| | | | | |
Comprehensive income (loss) attributable to Flowserve Corporation | $ | 75,276 | | | $ | (537) | | | $ | 74,739 | |
(1) Adjustments relate to the accounting error involving foreign currency transactions.
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(Amounts in thousands, except per share data) | Nine Months Ended September 30, 2020 |
| As Reported | | Adjustments(1) | | As Revised |
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Other income (expense), net | $ | 7,558 | | | $ | 16,411 | | | $ | 23,969 | |
Earnings before income taxes | 125,498 | | | 16,411 | | | 141,909 | |
Provision for income taxes | (59,175) | | | (1,475) | | | (60,650) | |
Net earnings, including noncontrolling interests | 66,323 | | | 14,936 | | | 81,259 | |
| | | | | |
Net earnings attributable to Flowserve Corporation | $ | 59,433 | | | $ | 14,936 | | | $ | 74,369 | |
Net earnings per share attributable to Flowserve Corporation common shareholders: | | | | | |
Basic | $ | 0.46 | | | $ | 0.11 | | | $ | 0.57 | |
Diluted | 0.45 | | | 0.12 | | | 0.57 | |
(1) Adjustments relate to the accounting error involving foreign currency transactions.
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| Nine Months Ended September 30, 2020 |
(Amounts in thousands) | As Reported | | Adjustments(1) | | As Revised |
Net earnings, including noncontrolling interests | $ | 66,323 | | | $ | 14,936 | | | $ | 81,259 | |
Other comprehensive income (loss): | | | | | |
Foreign currency translation adjustments, net of taxes | (41,022) | | | (16,434) | | | (57,456) | |
| | | | | |
| | | | | |
Other comprehensive income (loss) | (33,792) | | | (16,434) | | | (50,226) | |
Comprehensive income (loss), including noncontrolling interests | 32,531 | | | (1,498) | | | 31,033 | |
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Comprehensive income (loss) attributable to Flowserve Corporation | $ | 24,869 | | | $ | (1,498) | | | $ | 23,371 | |
(1) Adjustments relate to the accounting error involving foreign currency transactions.
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| December 31, 2020 |
(Amounts in thousands) | As Reported | | Adjustments(1) | | As Revised |
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Retirement obligations and other liabilities | $ | 516,087 | | | $ | 1,479 | | | $ | 517,566 | |
| | | | | |
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Retained earnings | 3,656,449 | | | 14,094 | | | 3,670,543 | |
| | | | | |
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Accumulated other comprehensive loss | (594,052) | | | (15,573) | | | (609,625) | |
Total Flowserve Corporation shareholders’ equity | 1,732,470 | | | (1,479) | | | 1,730,991 | |
| | | | | |
Total equity | 1,762,800 | | | (1,479) | | | 1,761,321 | |
| | | | | |
(1) Adjustments relate to the accounting error involving foreign currency transactions.
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(Amounts in thousands, except per share data) | Three Months Ended December 31, 2020 |
| As Reported | | Adjustments(1) | | As Revised |
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Other income (expense), net | $ | (17,811) | | | $ | (931) | | | $ | (18,742) | |
Earnings before income taxes | 61,314 | | | (931) | | | 60,383 | |
Provision for income taxes | (856) | | | 89 | | | (767) | |
Net earnings, including noncontrolling interests | 60,458 | | | (842) | | | 59,616 | |
| | | | | |
Net earnings attributable to Flowserve Corporation | $ | 56,893 | | | $ | (842) | | | $ | 56,051 | |
Net earnings per share attributable to Flowserve Corporation common shareholders: | | | | | |
Basic | $ | 0.44 | | | $ | (0.01) | | | $ | 0.43 | |
Diluted | 0.43 | | | 0 | | | 0.43 | |
(1) Adjustments relate to the accounting error involving foreign currency transactions.
| | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, 2020 |
(Amounts in thousands) | As Reported | | Adjustments(1) | | As Revised |
Net earnings, including noncontrolling interests | $ | 60,458 | | | $ | (842) | | | $ | 59,616 | |
Other comprehensive income (loss): | | | | | |
Foreign currency translation adjustments, net of taxes | 41,411 | | | 862 | | | 42,273 | |
| | | | | |
| | | | | |
Other comprehensive income (loss) | 24,803 | | | 862 | | | 25,665 | |
Comprehensive income (loss), including noncontrolling interests | 85,261 | | | 20 | | | 85,281 | |
| | | | | |
Comprehensive income (loss) attributable to Flowserve Corporation | $ | 81,698 | | | $ | 20 | | | $ | 81,718 | |
(1) Adjustments relate to the accounting error involving foreign currency transactions.
| | | | | | | | | | | | | | | | | |
(Amounts in thousands, except per share data) | Year Ended December 31, 2020 |
| As Reported | | Adjustments(1) | | As Revised |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Other income (expense), net | $ | (10,254) | | | $ | 15,480 | | | $ | 5,226 | |
Earnings before income taxes | 186,812 | | | 15,480 | | | 202,292 | |
Provision for income taxes | (60,031) | | | (1,386) | | | (61,417) | |
Net earnings, including noncontrolling interests | 126,781 | | | 14,094 | | | 140,875 | |
| | | | | |
Net earnings attributable to Flowserve Corporation | $ | 116,326 | | | $ | 14,094 | | | $ | 130,420 | |
Net earnings per share attributable to Flowserve Corporation common shareholders: | | | | | |
Basic | $ | 0.89 | | | $ | 0.11 | | | $ | 1.00 | |
Diluted | 0.89 | | | 0.11 | | | 1.00 | |
(1) Adjustments relate to the accounting error involving foreign currency transactions.
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2020 |
(Amounts in thousands) | As Reported | | Adjustments(1) | | As Revised |
Net earnings, including noncontrolling interests | $ | 126,781 | | | $ | 14,094 | | | $ | 140,875 | |
Other comprehensive income (loss): | | | | | |
Foreign currency translation adjustments, net of taxes | 388 | | | (15,571) | | | (15,183) | |
| | | | | |
| | | | | |
Other comprehensive income (loss) | (8,991) | | | (15,571) | | | (24,562) | |
Comprehensive income (loss), including noncontrolling interests | 117,790 | | | (1,477) | | | 116,313 | |
| | | | | |
Comprehensive income (loss) attributable to Flowserve Corporation | $ | 106,565 | | | $ | (1,477) | | | $ | 105,088 | |
(1) Adjustments relate to the accounting error involving foreign currency transactions.
The condensed consolidated statements of shareholders' equity for the three and six months ended June 30, 2020 have been revised to reflect the impacts of the above described in footnote (2) above.
(3) The provisionerrors. Additionally, the condensed consolidated statements of shareholders' equity for income taxes adjustments includethe periods from July 1, 2020 to September 30, 2020, January 1, 2020 to September 30, 2020 and for the year ended December 31, 2020, which will be revised the next time such financial statements are filed, have been corrected to reflect the impact of recording a valuation allowance of $(5.0) million relatedthe errors described above and there are no other adjustments impacting those statements.
The following tables present the impact to deferred tax assets that subsequently were determined to not be realizable, partially offset byaffected sub-totals for the tax effectcorrection of the matter described in footnote (2) above.
The effecterrors on our condensed consolidated statement of cash flows for the prior period revisionssix month and nine month periods ended June 30, 2020 and September 30, 2020, respectively. There was no impact on the condensed consolidated statement of cash flows for the nine monthsyear ended September 30, 2016December 31, 2020.
| | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2020 |
(Amounts in thousands) | As Reported | | Adjustments | | As Revised |
Net cash flows provided (used) by operating activities (1) | $ | 21,231 | | | $ | (1,048) | | | $ | 20,183 | |
Net cash flows provided (used) by investing activities (2) | (21,161) | | | 2,899 | | | (18,262) | |
Net cash flows provided (used) by financing activities(3) | (91,881) | | | (1,851) | | | (93,732) | |
Cash and cash equivalents at end of period | 561,705 | | | 0 | | | 561,705 | |
______________________________________(1) Adjustment relates to cumulative effect of the accounting errors that were corrected in the periods, as outlined above.
(2) Primarily related to adjustments resulting from the misclassification of Software as a service arrangements as property, plant and equipment rather than other assets, net, earnings, including noncontrolling interests, foras prescribed by ASU 2018-15.
(3) Primarily resulting from the changemisclassification of non-cash items under proceeds and payments under other financing arrangements in financing activities, rather than other assets, net, earnings in operating activities.
| | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2020 |
(Amounts in thousands) | As Reported | | Adjustments | | As Revised |
Net cash flows provided (used) by operating activities (1) | $ | 115,629 | | | $ | (1,380) | | | $ | 114,249 | |
Net cash flows provided (used) by investing activities (1) | (34,160) | | | 1,495 | | | (32,665) | |
Net cash flows provided (used) by financing activities | 178,972 | | | (115) | | | 178,857 | |
Cash and cash equivalents at end of period | 921,178 | | | 0 | | | 921,178 | |
(1) Primarily related to adjustments resulting from the table above, offset primarilymisclassification of Software as a service arrangements as property, plant and equipment rather than other assets, net, as prescribed by impacts to changes in assets and liabilities. The revisions to individual line items were below $3 million except for the classification change within operating activity cash flows of $15.9 million from Latin America inventory write downs to inventories, net and an increase of $10.3 million to Latin America accounts receivables reserve. Additionally, we adopted ASU 2016-09 on January 1, 2017, see Note 1 for further discussion of the impact of that adoption on our statements of cash flows.2018-15.
The impacts of the revisions have been reflected throughout the financial statements, including the applicable footnotes, as appropriate.
On July 6, 2017,3.Revenue Recognition
The majority of our revenues relate to customer orders that typically contain a single commitment of goods or services which have lead times under a year. Longer lead time, more complex contracts with our customers typically have multiple commitments of goods and services, including any combination of designing, developing, manufacturing, modifying, installing and commissioning of flow management equipment and providing services and parts related to the performance of such products. Control transfers over time when the customer is able to direct the use of and obtain substantially all of the benefits of our work as we soldperform.
Our primary method for recognizing revenue over time is the percentage of completion ("POC") method. Revenue from products and services transferred to customers over time accounted for approximately 15% and 22% of total revenue for the three month period ended June 30, 2021 and 2020, respectively, and 16% and 22% for the six month period ended June 30, 2021 and 2020, respectively. If control does not transfer over time, then control transfers at a point in time. We recognize revenue at a point in time at the level of each performance obligation based on the evaluation of certain indicators of control transfer, such as title transfer, risk of loss transfer, customer acceptance and physical possession. Revenue from products and services transferred to customers at a point in time accounted for approximately 85% and 78% of total revenue for the three month period ended June 30, 2021 and 2020, respectively, and 84% and 78% for the six month period ended June 30, 2021 and 2020, respectively. Refer to Note 3 to our consolidated financial statements included in our 2020 Annual Report for a more comprehensive discussion of our policies and accounting practices of revenue recognition.
Disaggregated Revenue
We conduct our operations through 2 business segments based on the type of product and how we manage the business:
•Flowserve Pump Division ("FPD") designs and manufactures custom, highly-engineered pumps, pre-configured industrial pumps, pump systems, mechanical seals, auxiliary systems and replacement parts and related services; and
•Flow Control Division'sDivision ("FCD") Vogt product linedesigns, manufactures and distributes a broad portfolio of engineered-to-order and configured-to-order isolation valves, control valves, valve automation products and related equipment.
Our revenue sources are derived from our original equipment manufacturing and our aftermarket sales and services. Our original equipment revenues are generally related to originally designed, manufactured, distributed and installed equipment that can range from pre-configured, short-cycle products to more customized, highly-engineered equipment ("Original Equipment"). Our aftermarket sales and services are derived from sales of replacement equipment, as well as maintenance, advanced diagnostic, repair and retrofitting services ("Aftermarket"). Each of our 2 business segments generate Original Equipment and Aftermarket revenues.
The following tables present our customer revenues disaggregated by revenue source:
| | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2021 |
(Amounts in thousands) | FPD | | FCD | | Total |
Original Equipment | $ | 220,387 | | | $ | 214,097 | | | $ | 434,484 | |
Aftermarket | 397,047 | | | 66,647 | | | 463,694 | |
| $ | 617,434 | | | $ | 280,744 | | | $ | 898,178 | |
| | | | | |
| Three Months Ended June 30, 2020 |
| FPD | | FCD | | Total |
Original Equipment | $ | 271,465 | | | $ | 191,358 | | | $ | 462,823 | |
Aftermarket | 402,089 | | | 60,100 | | | 462,189 | |
| $ | 673,554 | | | $ | 251,458 | | | $ | 925,012 | |
| | | | | | | | | | | | | | | | | |
| | | | | |
| Six Months Ended June 30, 2021 |
(Amounts in thousands) | FPD | | FCD | | Total |
Original Equipment | $ | 434,541 | | | $ | 406,817 | | | $ | 841,358 | |
Aftermarket | 785,059 | | | 129,069 | | | 914,128 | |
| $ | 1,219,600 | | | $ | 535,886 | | | $ | 1,755,486 | |
| | | | | |
| Six Months Ended June 30, 2020 |
| FPD | | FCD | | Total |
Original Equipment | $ | 524,198 | | | $ | 389,977 | | | $ | 914,175 | |
Aftermarket | 784,482 | | | 119,869 | | | 904,351 | |
| $ | 1,308,680 | | | $ | 509,846 | | | $ | 1,818,526 | |
Our customer sales are diversified geographically. The following tables present our revenues disaggregated by geography, based on the shipping addresses of our customers:
| | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2021 |
(Amounts in thousands) | FPD | | FCD | | Total |
North America(1) | $ | 243,611 | | | $ | 98,118 | | | $ | 341,729 | |
Latin America(2) | 52,219 | | | 8,879 | | | 61,098 | |
Middle East and Africa | 69,662 | | | 26,530 | | | 96,192 | |
Asia Pacific | 119,375 | | | 88,944 | | | 208,319 | |
Europe | 132,567 | | | 58,273 | | | 190,840 | |
| $ | 617,434 | | | $ | 280,744 | | | $ | 898,178 | |
| | | | | |
| Three Months Ended June 30, 2020 |
| FPD | | FCD | | Total |
North America(1) | $ | 269,610 | | | $ | 106,737 | | | $ | 376,347 | |
Latin America(2) | 46,909 | | | 6,905 | | | 53,814 | |
Middle East and Africa | 96,740 | | | 21,687 | | | 118,427 | |
Asia Pacific | 128,102 | | | 64,546 | | | 192,648 | |
Europe | 132,193 | | | 51,583 | | | 183,776 | |
| $ | 673,554 | | | $ | 251,458 | | | $ | 925,012 | |
| | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2021 |
(Amounts in thousands) | FPD | | FCD | | Total |
North America(1) | $ | 467,582 | | | $ | 188,368 | | | $ | 655,950 | |
Latin America(2) | 94,256 | | | 15,694 | | | 109,950 | |
Middle East and Africa | 152,207 | | | 54,226 | | | 206,433 | |
Asia Pacific | 244,027 | | | 167,600 | | | 411,627 | |
Europe | 261,528 | | | 109,998 | | | 371,526 | |
| $ | 1,219,600 | | | $ | 535,886 | | | $ | 1,755,486 | |
| | | | | |
| Six Months Ended June 30, 2020 |
| FPD | | FCD | | Total |
North America(1) | $ | 537,135 | | | $ | 229,862 | | | $ | 766,997 | |
Latin America(2) | 89,096 | | | 12,415 | | | 101,511 | |
Middle East and Africa | 193,908 | | | 48,352 | | | 242,260 | |
Asia Pacific | 240,557 | | | 119,103 | | | 359,660 | |
Europe | 247,984 | | | 100,114 | | | 348,098 | |
| $ | 1,308,680 | | | $ | 509,846 | | | $ | 1,818,526 | |
(1) North America represents the United States and Canada.
(2) Latin America includes Mexico.
On June 30, 2021, the aggregate transaction price allocated to unsatisfied (or partially unsatisfied) performance obligations was approximately $470 million. We estimate recognition of approximately $294 million of this amount as revenue in the remainder of 2021 and an additional $176 million in 2022 and thereafter.
Contract Balances
We receive payment from customers based on a contractual billing schedule and specific performance requirements as established in our contracts. We record billings as accounts receivable when an unconditional right to consideration exists. A contract asset represents revenue recognized in advance of our right to receive payment under the terms of a contract. A contract liability represents our right to receive payment in advance of revenue recognized for a contract.
The following tables present beginning and ending balances of contract assets and contract liabilities, current and long-term, for the six months ended June 30, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | | |
(Amounts in thousands) | Contract Assets, net (Current) | | Long-term Contract Assets, net(1) | | Contract Liabilities (Current) | | Long-term Contract Liabilities(2) | |
Beginning balance, January 1, 2021 | $ | 277,734 | | | $ | 1,139 | | | $ | 194,227 | | | $ | 822 | | |
Revenue recognized that was included in contract liabilities at the beginning of the period | 0 | | | 0 | | | (112,835) | | | 0 | | |
Revenue recognized in the period in excess of billings | 321,040 | | | 54 | | | 0 | | | 0 | | |
Billings arising during the period in excess of revenue recognized | 0 | | | 0 | | | 126,591 | | | 0 | | |
Amounts transferred from contract assets to receivables | (326,634) | | | (28) | | | 0 | | | 0 | | |
| | | | | | | | |
Currency effects and other, net | (9,909) | | | (86) | | | 1,109 | | | (19) | | |
Ending balance, June 30, 2021 | $ | 262,231 | | | $ | 1,079 | | | $ | 209,092 | | | $ | 803 | | |
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| | | | | | | | | | | | | | | | | | | | | | | |
(Amounts in thousands) | Contract Assets, net (Current) | | Long-term Contract Assets, net(1) | | Contract Liabilities (Current) | | Long-term Contract Liabilities(2) |
Beginning balance, January 1, 2020 | $ | 272,914 | | | $ | 9,280 | | | $ | 221,095 | | | $ | 1,652 | |
Revenue recognized that was included in contract liabilities at the beginning of the period | 0 | | | 0 | | | (138,994) | | | (646) | |
Revenue recognized in the period in excess of billings | 386,250 | | | 511 | | | 0 | | | 0 | |
Billings arising during the period in excess of revenue recognized | 0 | | | 0 | | | 141,156 | | | 0 | |
Amounts transferred from contract assets to receivables | (335,505) | | | (93) | | | 0 | | | 0 | |
| | | | | | | |
Currency effects and other, net | (14,463) | | | (6,689) | | | (3,624) | | | (31) | |
Ending balance, June 30, 2020 | $ | 309,196 | | | $ | 3,009 | | | $ | 219,633 | | | $ | 975 | |
(1) Included in other assets, net.
(2) Included in retirement obligations and other liabilities.
4.Allowance for Expected Credit Losses
The allowance for credit losses is an estimate of the credit losses expected over the life of our financial assets and instruments. We assess and measure expected credit losses on a collective basis when similar risk characteristics exist, including market, geography, credit risk and remaining duration. Financial assets and instruments that do not share risk characteristics are evaluated on an individual basis. Our estimate of the allowance balance is assessed and quantified using internal and external valuation information relating to past events, current conditions and reasonable and supportable forecasts over the contractual terms of an asset.
Our primary exposure to expected credit losses is through our trade receivables and contract assets. For these financial assets, we record an allowance for expected credit losses that, when deducted from the gross asset balance, presents the net amount expected to be collected. Primarily, our experience of historical credit losses provides the basis for our estimation of the allowance. We estimate the allowance based on an aging schedule and according to historical losses as determined from our history of billings and collections. Additionally, we adjust the allowance for factors that are specific to our customers’ credit
risk such as financial difficulties, liquidity issues, insolvency, and country and geopolitical risks. We also consider both the current and forecasted macroeconomic conditions as of the reporting date. As identified and needed, we adjust the allowance and recognize adjustments in the income statement each period. Trade receivables are written off against the allowance in the period when the receivable is deemed to be uncollectible. Subsequent recoveries of previously written off amounts are reflected as a privately held company for $28.0 million of cash received at closing. The sale resulted in a pre-tax gain of $10.9 million recorded in gain on sale of businessreduction to credit impairment losses in the condensed consolidated statements of income. In 2016, net sales related
Contract assets represent a conditional right to consideration for satisfied performance obligations that become a receivable when the Vogt business totaledconditions are satisfied. Generally, contract assets are recorded when contractual billing schedules differ from revenue recognition based on timing and are managed through the revenue recognition process. Based on our historical credit loss experience, the current expected credit loss for contract assets is estimated to be approximately $17 million, with earnings before interest and taxes1% of approximately $4 million.the asset balance.
Effective May 2, 2017, we sold our FCD's Gestra AG ("Gestra") business to a leading provider of steam system solutions for $203.6 million (€178.3 million), which included $180.8 million (€158.3 million) of cash received at closing (net of divested cash and subsequent working capital adjustments). Additionally, we expect to receive $23.6 million (€20.0 million) of cash currently held in escrow before
The following table presents the end of 2017, which we have classified as an other current asset in prepaid expenses and other. The sale resulted in a pre-tax gain of $130.2 million ($79.4 million after-tax) recorded in gain on sale of businesschanges in the condensed consolidated statementsallowance for expected credit losses for our trade receivables and contract assets for the six months ended June 30, 2021 and 2020:
| | | | | | | | | | | |
(Amounts in thousands) | Trade receivables | | Contract assets |
Beginning balance, January 1, 2021 | $ | 75,176 | | | $ | 3,205 | |
Charges to cost and expenses, net of recoveries | 865 | | | 0 | |
Write-offs | (2,015) | | | 0 | |
Currency effects and other, net | 756 | | | (167) | |
Ending balance, June 30, 2021 | $ | 74,782 | | | $ | 3,038 | |
| | | |
Beginning balance, January 1, 2020 | $ | 53,412 | | | $ | 206 | |
Adoption of ASU 2016-13 | 6,970 | | | 2,779 | |
Charges to cost and expenses, net of recoveries | 11,800 | | | 0 | |
| | | |
Currency effects and other, net | (98) | | | 25 | |
Ending balance, June 30, 2020 | $ | 72,084 | | | $ | 3,010 | |
Our allowance on long-term receivables, included in other assets, net, represent receivables with collection periods longer than 12 months and the balance primarily consists of income. reserved receivables associated with the national oil company in Venezuela. The sale included Gestra’s manufacturing facility in Germany as well as related operationsfollowing table presents the changes in the U.S.,allowance for long-term receivables for the United Kingdom ("U.K."), Spain, Poland, Italy, Singaporesix months ended June 30, 2021 and Portugal. In 2016, Gestra recorded revenues2020:
| | | | | | | | | | | | | |
(Amounts in thousands) | 2021 | | 2020 | | |
Balance at January 1 | $ | 67,842 | | | $ | 68,555 | | | |
Adoption of ASU 2016-13 | 0 | | | (679) | | | |
| | | | | |
| | | | | |
Currency effects and other, net | (72) | | | (617) | | | |
Balance at June 30 | $ | 67,770 | | | $ | 67,259 | | | |
We also have exposure to credit losses from off-balance sheet exposures, such as financial guarantees and standby letters of approximately $101 million (€92 million) with earnings before interest and taxescredit, where we believe the risk of approximately $17 million (€15 million).loss is immaterial to our financial statements as of June 30, 2021.
95.Stock-Based Compensation Plans
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4. | Stock-Based Compensation Plans |
We maintain the Flowserve Corporation Equity and2020 Long-Term Incentive Compensation Plan (the "2010 Plan"(“2020 Plan”), which is a shareholder-approvedshareholder approved plan authorizing the issuance of up to 8,700,00012,500,000 shares of our common stock in the form of restricted shares, restricted share units and performance-based units (collectively referred to as "Restricted Shares"), incentive stock options, non-statutory stock options, stock appreciation rights and bonus stock. Of the 8,700,000 shares of common stock authorized under the 20102020 Plan, 2,634,90811,273,436 were available for issuance as of SeptemberJune 30, 2017. In 2016 the long-term incentive program was amended to allow2021. Restricted Shares primarily vest over a three year period. Restricted Shares granted after January 1, 2016 to employees who retire and have achieved at least 55 years of age and 10 years of service to continue to vest over the original vesting period ("55/10 Provision"). Until the second quarterAs of 2017, no previousJune 30, 2021, 114,943 stock options were outstanding. On May 4, 2017, 114,943NaN stock options were granted with a grant date fair value of $2.0 million, which is expected to be recognized over a weighted-average period of approximately three years. No stock optionsor vested during the ninesix months ended SeptemberJune 30, 2017.2021 and 2020.
Restricted Shares – Awards of Restricted Shares are valued at the closing market price of our common stock on the date of grant. The unearned compensation is amortized to compensation expense over the vesting period of the restricted shares, except for awards related to the 55/10 Provision which are expensed in the period granted. We had unearned compensation of $20.6$38.1 million and $15.2$18.7 million at SeptemberJune 30, 20172021 and December 31, 2016,2020, respectively, which is expected to be recognized over a remaining weighted-average period of approximately oneapproximately two years. These amounts will be recognized into net earnings in prospective periods as the awardsawards vest. The total fair value of Restricted Shares vested during the three months ended SeptemberJune 30, 20172021 and 20162020 was $0.2$0.9 million and $0.6$2.9 million, respectively. The total fair value of Restricted Shares vested during the ninesix months ended SeptemberJune 30, 20172021 and 20162020 was $28.1$24.4 million and $38.7$21.0 million, respectively.
We recorded stock-based compensation expense of $3.0$5.1 million ($4.66.7 million pre-tax) and $3.9$3.3 million ($6.04.2 million pre-tax) for the three months ended SeptemberJune 30, 20172021 and 2016,2020, respectively. We recorded stock-based compensation expense of $13.4$12.7 million ($20.316.5 million pre-tax) and $19.6$14.4 million ($30.0 ($18.5 million pre-tax) for the ninesix months ended SeptemberJune 30, 20172021 and 2016,2020, respectively.
The following table summarizes information regarding Restricted Shares:
| | | | | | | | | | | |
| Six Months Ended June 30, 2021 |
| Shares | | Weighted Average Grant-Date Fair Value |
Number of unvested shares: | | | |
Outstanding - January 1, 2021 | 1,373,657 | | | $ | 46.76 | |
Granted | 995,204 | | | 39.59 | |
Vested | (550,370) | | | 44.27 | |
Forfeited | (117,090) | | | 48.01 | |
Outstanding as of June 30, 2021 | 1,701,401 | | | $ | 43.29 | |
|
| | | | | | |
| Nine Months Ended September 30, 2017 |
| Shares | | Weighted Average Grant-Date Fair Value |
Number of unvested shares: | | | |
Outstanding - January 1, 2017 | 1,259,275 |
| | $ | 50.77 |
|
Granted | 697,832 |
| | 49.81 |
|
Vested | (473,426 | ) | | 59.38 |
|
Canceled | (207,618 | ) | | 48.00 |
|
Outstanding as of September 30, 2017 | 1,276,063 |
| | $ | 47.50 |
|
Unvested Restricted Shares outstanding as of SeptemberJune 30, 2017, includes2021 included approximately 888,000 509,000 units with performance-based vesting provisions. Performance-based units areprovisions issuable in common stock and vest upon the achievement of pre-defined performance targets. Performance-based units granted prior to 2017 havemetrics. Targets for outstanding performance targets based on our average annual return on net assets over a three-year period as compared with the same measure for a defined peer group for the same period. Performance-based units granted in 2017 have performance targetsawards are based on our average return on invested capital, and our total shareholder return ("TSR") or free cash flow as a percent of net income over a three-year period as compared withperiod. Performance units issued in 2021 include a secondary measure, relative total shareholder return, which can increase or decrease the same measures for a defined peer group fornumber of vesting units by 15% depending on the same period. MostCompany's performance versus peers. Performance units were grantedissued in three annual grants since January 1, 20152019 and 2020 have a vesting percentage between 0% and 200% depending on, while the achievement of the specific2021 performance targets. Except for shares granted under the 55/10 Provision, compensationunits have a vesting percentage up to 230%. Compensation expense is recognized ratably over a cliff-vesting period of 36 months, based on the fair value of our common stock on the date of grant, as adjusted for actual forfeitures. During the performance period, earned and unearned compensation expense is adjusted based on changes in the expected achievement of the performance targets for all performance-based units granted except for the TSR-based units. Vesting provisions range from 0 to approximately 1,701,0001,063,000 shares based on performance targets. As of SeptemberJune 30, 2017,2021, we estimate vesting of approximately 663,000480,000 shares based on expected achievement of performance targets.
106.Derivative Instruments and Hedges
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5. | Derivative Instruments and Hedges |
Our risk management and foreign currency derivatives and hedging policy specifies the conditions under which we may enter into derivative contracts. See Notes 1 and 69 to our consolidated financial statements included in our 20162020 Annual Report and Note 7 of8 of this Quarterly Report for additional information on our derivatives. We enter into foreign exchange forward contracts to hedge our cash flow risks associated with transactions denominated in currencies other than the local currency of the operation engaging in the transaction.
During the second quarter of 2017, we discontinued our program to designate forward exchange contracts. The discontinuance of this program had no impact on our financial position as of September 30, 2017. ForeignForeign exchange contracts with third parties not designated as hedging instruments had a notional value of $237.6$385.7 million and $393.2$388.1 million at SeptemberJune 30, 20172021 and December 31, 2016,2020, respectively. At SeptemberJune 30, 2017,2021, the length of foreign exchange contracts currently in place ranged from 226 days to 2027 months.
We are exposed to risk from credit-related losses resulting from nonperformancenonperformance by counterparties to our financial instruments. We perform credit evaluations of our counterparties under foreign exchange contracts agreements and expect all counterparties to meet their obligations. We have not experienced credit losses from our counterparties.
The fair values of foreign exchange contracts are summarized below:
| | | | | | | | | | | |
| June 30, | | December 31, |
(Amounts in thousands) | 2021 | | 2020 |
Current derivative assets | $ | 1,389 | | | $ | 2,857 | |
Noncurrent derivative assets | 20 | | | 249 | |
Current derivative liabilities | 914 | | | 682 | |
Noncurrent derivative liabilities | 62 | | | 0 | |
|
| | | | | | | |
| September 30, | | December 31, |
(Amounts in thousands) | 2017 | | 2016 |
Current derivative assets | $ | 2,526 |
| | $ | 682 |
|
Noncurrent derivative assets | 173 |
| | — |
|
Current derivative liabilities | 1,172 |
| | 6,878 |
|
Noncurrent derivative liabilities | 42 |
| | 355 |
|
Current and noncurrent derivative assets are reported in our condensed consolidated balance sheets in prepaid expenses and other and other assets, net, respectively. Current and noncurrent derivative liabilities are reported in our condensed consolidated balance sheets in accrued liabilities and retirement obligations and other liabilities, respectively.
The impact of net changes in the fair values of foreign exchange contracts are summarized below:
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
(Amounts in thousands) | 2017 | | 2016 | | 2017 | | 2016 | (Amounts in thousands) | 2021 | | 2020 | | 2021 | | 2020 |
Gain (loss) recognized in income | $ | 548 |
| | $ | (774 | ) | | $ | 219 |
| | $ | 5,587 |
| |
(Losses) gains recognized in income | | (Losses) gains recognized in income | $ | (4,312) | | | $ | (3,520) | | | $ | 1,793 | | | $ | (61) | |
Gains and losses recognized in our condensed consolidated statements of income for foreign exchange contracts are classified as other income (expense) income,, net.
As a means of managing the volatility of foreign currency exposure with the Euro/U.S. dollar exchange rate, we enter into cross-currency swaps agreements ("Swaps") as a hedge of our Euro investment in certain of our international subsidiaries. Accordingly, on April 14, 2021 and March 9, 2021, we entered into cross currency swap agreements, with termination dates of October 1, 2030 and an early termination date of March 11, 2025, respectively. Also, during the third quarter of 2020 we entered into a cross currency swap agreement with an early termination date of September 22, 2025. The swap agreements are designated as net investment hedges and as of June 30, 2021 the combined notional value of these swaps was €423.2 million. The swaps are included in retirement obligations and other liabilities in our condensed consolidated balance sheet as of June 30, 2021, with a fair value of $5.3 million, compared to $18.1 million as of December 31, 2020. The swaps are classified as Level II under the fair value hierarchy.
We exclude the interest accruals on the swaps from the assessment of hedge effectiveness and recognize the interest accruals in earnings within interest expense. For each reporting period, the change in the fair value of the swaps attributable to changes in the spot rate and differences between the change in the fair value of the excluded components and the amounts recognized in earnings under the swap accrual process are reported in accumulated other comprehensive loss on our consolidated balance sheet. For the three and six months ending June 30, 2021, an interest accrual of $(2.1) million and $(2.7) million, respectively, was recognized in other income (expense), net, in our condensed consolidated statements of income.
The cumulative net investment hedge loss, net of deferred taxes, under cross-currency swaps recorded in accumulated other comprehensive loss ("AOCL") on our condensed consolidated balance sheet are summarized below:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(Amounts in thousands) | 2021 | | 2020 | | 2021 | | 2020 |
Loss (gain)-included component (1) | $ | 1,798 | | | $ | 0 | | | $ | 185 | | | $ | 0 | |
(Gain) loss-excluded component (2) | (11,749) | | | 0 | | | 3,890 | | | 0 | |
(Gain) loss recognized in AOCL | $ | (9,951) | | | $ | 0 | | | $ | 4,075 | | | $ | 0 | |
(1) Change in the fair value of the swaps attributable to changes in spot rates.
(2) Change in the fair value of the swaps due to changes other than those attributable to spot rates.
In March 2015, we designated €255.7 million of our €500.0 million1.25% EUR 2022 Senior Notes ("2022 Euro senior notesSenior Notes") discussed in Note 67 as a net investment hedge of our investmentsEuro investment in certain of our international subsidiaries that usesubsidiaries. On September 22, 2020, we increased the designated hedged value on the 2022 Euro as their functional currency. We usedSenior Notes to €336.3 million, which reflected the spot method to measureremaining balance of the effectiveness of our net investment hedge. Under this method, for2022 Euro Senior Notes. For each reporting period, the change in the carrying value of the Euro senior notes due to the remeasurement of the effective portion is reported in accumulated other comprehensive lossAOCL on our condensed consolidated balance sheet and the remaining change in the
carrying value of the ineffective portion, if any, is recognized in other expense,income (expense), net in our condensed consolidated statementstatements of income. We evaluateAs a result of the effectivenessredemption of our 2022 Euro Senior Notes discussed in Note 7, in February and March of 2021 we dedesignated the hedged value of our net investment hedge.
Prior to the dedesignation, the cumulative impact recorded in AOCL on our condensed consolidated balance sheet from the change in carrying value due to the remeasurement of the effective portion of the net investment hedge are summarized below:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
| (Amounts in thousands) |
Loss recognized in AOCL | $ | 0 | | | $ | 3,990 | | | $ | 29,554 | | | $ | 12,510 | |
Prior to the dedesignation of the net investment hedge, we used the spot method to measure the effectiveness of both net investment hedges and evaluate the effectiveness on a prospective basis at the beginning of each quarter. We did not record any ineffectiveness for during the ninethree and six months ended SeptemberJune 30, 20172021 and 2016.2020, respectively.
Debt, including capitalfinance lease obligations, net of discounts and debt issuance costs, consisted of: | | | | | | | | | | | |
| June 30, | | December 31, |
(Amounts in thousands, except percentages) | 2021 | | 2020 |
1.25% EUR Senior Notes due March 17, 2022, net of unamortized discount and debt issuance costs of $1,070 as of December 31, 2020 | $ | 0 | | | $ | 410,243 | |
3.50% USD Senior Notes due September 15, 2022, net of unamortized discount and debt issuance costs of $882 and $1,235 | 499,118 | | | 498,765 | |
4.00% USD Senior Notes due November 15, 2023, net of unamortized discount and debt issuance costs of $1,122 and $1,345 | 298,878 | | | 298,655 | |
3.50% USD Senior Notes due October 1, 2030, net of unamortized discount and debt issuance costs of $5,881 and $6,147 | 494,119 | | | 493,853 | |
| | | |
Finance lease obligations and other borrowings | 24,633 | | | 25,390 | |
Debt and finance lease obligations | 1,316,748 | | | 1,726,906 | |
Less amounts due within one year | 9,599 | | | 8,995 | |
| | | |
Total debt due after one year | $ | 1,307,149 | | | $ | 1,717,911 | |
|
| | | | | | | |
| September 30, | | December 31, |
(Amounts in thousands, except percentages) | 2017 | | 2016 |
1.25% EUR Senior Notes due March 17, 2022, net of unamortized discount and debt issuance costs of $5,558 and $5,748 | $ | 585,042 |
| | $ | 519,902 |
|
4.00% USD Senior Notes due November 15, 2023, net of unamortized discount and debt issuance costs of $2,687 and $2,972 | 297,313 |
| | 297,028 |
|
3.50% USD Senior Notes due September 15, 2022, net of unamortized discount and debt issuance costs of $3,386 and $3,848 | 496,614 |
| | 496,152 |
|
Term Loan Facility, interest rate of 2.58% at September 30, 2017 and 2.25% at December 31, 2016, net of debt issuance costs of $694 and $745 | 179,306 |
| | 224,255 |
|
Capital lease obligations and other borrowings | 28,417 |
| | 33,286 |
|
Debt and capital lease obligations | 1,586,692 |
| | 1,570,623 |
|
Less amounts due within one year | 80,635 |
| | 85,365 |
|
Total debt due after one year | $ | 1,506,057 |
| | $ | 1,485,258 |
|
Senior NotesOn March 19, 2021, we redeemed the remaining $400.9 million of our 2022 Euro Senior Notes and have recorded a loss on early extinguishment of $7.6 million, which included the impact of a $6.6 million make-whole premium. During the third quarter of 2020 we tendered $191.4 million of our 2022 Euro Senior Notes and recorded a loss on early extinguishment of $1.2 million in interest expense.
Senior Credit Facility
As discussed in Note 10 to our consolidated financial statements included in our 2016 Annual Report,On September 4, 2020, we amended our credit agreement with Bank of America, N.A., as administrative agent, and the other lenders party thereto ("Amended Credit Agreement") to provide greater flexibility in maintaining adequate liquidity in the event we have the need to access available borrowings under our Senior Credit Facility ("Credit Facility"). The Amended Credit Agreement provides for an initial $400.0$800.0 million term loan (“Term Loan Facility”) and a $1.0 billion revolvingunsecured senior credit facility (“Revolving Credit Facility” and, together with the Term Loan Facility, the “Senior Credit Facility”) with a maturity date of October 14, 2020. OnJuly 16, 2024. The Credit Facility includes a $750.0 million sublimit for the issuance of letters of credit and a $30.0 million sublimit for swing line loans. We have the right to increase the amount of the Credit Facility by an aggregate amount not to exceed $400.0 million, subject to certain conditions, including each Lender's approval providing any increase.
The Amended Credit Agreement, among other things, (i) replaces the existing leverage ratio financial covenant (the “Existing Leverage Covenant”) with a leverage ratio financial covenant that requires the Company’s ratio of consolidated funded indebtedness, minus the amount of all cash and cash equivalents on our balance sheet in excess of $250.0 million, to the Company’s Consolidated EBITDA, not to exceed 4.00 to 1.00 as of the last day of any quarter through and including December
31, 2021 (the “Covenant Relief Period”), (ii) amends the Existing Leverage Covenant to provide that it will not be tested until the quarter ending March 31, 2022, (iii) provides that the Existing Leverage Covenant, beginning March 31, 2022, cannot exceed 4.00 to 1.00 (or as increased to 4.50 to 1.00 in connection with certain acquisitions) and (iv) limits the Company’s ability to pay dividends and repurchase its shares of common stock, par value $1.25, during the Covenant Relief Period, to an amount not to exceed 115% of the total amount of dividends and share repurchases we made during the period commencing January 1, 2019 through and including June 30, 2017, we amended our existing Senior Credit Facility. 2020.
The amendment, among other changes, includes the following: (i) a decrease of the Revolving Credit Facility commitment from $1.0 billioninterest rates per annum applicable to $800 million, (ii) an increase of the leverage ratio from 3.50 to 4.00 times debt to total Consolidated EBITDA, through June 30, 2019, with a step-down to 3.75 for any fiscal quarter ending after July 1, 2019, (iii) the addition of a new pricing level on our senior unsecured long-term debt ratings for Ba2/BB, with an increase in interest rate margin for LIBOR loans to 2.00% and for base rate loans to 1.00% and (iv) a revision to the restrictions on the ability to incur debt by decreasing the maximum principal amount of priority debt allowed from 15% to 7.5% of the consolidated tangible assets and a decrease on the maximum amount of receivables that could be securitized from $200 million to $100 million. All other material terms and conditions of the Senior Credit Facility, remained unchanged as discussedother than with respect to swing line loans, are LIBOR plus between 1.000% to 1.750%, depending on our debt rating by either Moody’s Investors Service, Inc. or Standard & Poor’s Financial Services LLC ("S&P") Ratings, or, at our option, the Base Rate (as defined in Note 10the Credit Agreement) plus between 0.000% to 0.750% depending on our consolidated financial statements includeddebt rating by either Moody’s Investors Service, Inc. or S&P Ratings. At June 30, 2021, the interest rate on the Senior Credit Facility was LIBOR plus 1.375% in the case of LIBOR loans and the Base Rate plus 0.375% in the case of Base Rate loans. In addition, a commitment fee is payable quarterly in arrears on the daily unused portions of the Credit Facility. The commitment fee will be between 0.090% and 0.300% of unused amounts under the Credit Facility depending on our 2016 Annual Report.debt rating by either Moody’s Investors Service, Inc. or S&P’s Ratings. The commitment fee was 0.20% (per annum) during the three and six months ended June 30, 2021.
As of SeptemberJune 30, 20172021 and December 31, 2016,2020, we had no amounts outstanding under the Revolving Credit Facility.0 revolving loans outstanding. We had outstanding letters of credit of $91.8$61.1 million and $102.6$58.1 million at SeptemberJune 30, 20172021 and December 31, 2016, respectively, which reduced2020, respectively. As of June 30, 2021, the amount available for borrowings under our borrowing capacitySenior Credit Facility was $738.9 million, compared to $708.2$741.9 million and $553.5 million, respectively. at December 31, 2020.
Our compliance with applicable financial covenants under the Senior Notes and Credit Facility isare tested quarterly, and we compliedquarterly. We were in compliance with all applicable covenants as of SeptemberJune 30, 2017.2021.
We may prepay loans under our Senior Credit Facility in whole or in part, without premium or penalty, at any time. A commitment fee, which is payable quarterly on the daily unused portions of the Senior Credit Facility, was 0.150% (per annum) during the period ended September 30, 2017. During the nine months ended September 30, 2017, we made scheduled repayments of $45.0 million under our Term Loan Facility. We have scheduled repayments of $15.0 million due in each of the next four quarters on our Term Loan Facility.
8.Fair Value
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models may be applied. Assets and liabilities recorded at fair value in our condensed consolidated balance sheets are categorized by hierarchical levels based upon the level of judgment associated associated with the inputs used to measure their fair values. Recurring fair value measurements are limited to investments in derivative instruments. The fair value measurements of our derivative instruments are determined using models that maximize the use of the observable market inputs including interest rate curves and both forward and spot prices for currencies, and are classified as Level II under the fair value hierarchy. The fair values of our derivatives are included in Note 5.6.
Ourour financial instruments are presented at fair valueas reflected in our condensed consolidated balance sheets approximates fair value, with the exception of our long-term debt. The estimated fair value of our long-term debt, excluding the Senior Notes, approximatesapproximates the carrying value and is classified as Level II under the fair value hierarchy. The carrying value of our debt is included in Note 6.7. The estimated fair value of our Senior Notes at SeptemberJune 30, 20172021 was $1,400.1$1,356.4 million compared to the carrying value of $1,379.0$1,292.1 million. The estimated fair value of the Senior Notes is based on Level I quoted market rates. The carrying amounts of our other financial instruments (e.g., cash and cash equivalents, accounts receivable, net, accounts payable and short-term debt) approximatedapproximated fair value due to their short-term nature at SeptemberJune 30, 20172021 and December 31, 2016.2020.
9.Inventories
Inventories, net consisted of the following: | | | | | | | | | | | |
| June 30, | | December 31, |
(Amounts in thousands) | 2021 | | 2020 |
Raw materials | $ | 327,799 | | | $ | 321,600 | |
Work in process | 253,097 | | | 210,174 | |
Finished goods | 201,802 | | | 221,532 | |
| | | |
Less: Excess and obsolete reserve | (92,553) | | | (86,078) | |
Inventories, net | $ | 690,145 | | | $ | 667,228 | |
10.Earnings Per Share
|
| | | | | | | |
| September 30, | | December 31, |
(Amounts in thousands) | 2017 | | 2016 |
Raw materials | $ | 374,154 |
| | $ | 348,012 |
|
Work in process | 682,522 |
| | 629,766 |
|
Finished goods | 208,465 |
| | 206,086 |
|
Less: Progress billings | (233,040 | ) | | (216,783 | ) |
Less: Excess and obsolete reserve | (80,503 | ) | | (69,391 | ) |
Inventories, net | $ | 951,598 |
| | $ | 897,690 |
|
In the second quarter of 2017 we recorded a $16.9 million inventory charge for costs incurred related to a contract to supply oil and gas platform equipment to an end user in Latin America. This charge was primarily related to our IPD reporting segment and resulted in a decrease to finished goods.
The following is a reconciliation of net earnings of Flowserve Corporation and weighted average shares for calculating net earnings per common share. Earnings per weighted average common share outstanding was calculated as follows:
| | | | | | | | | | | |
| Three Months Ended June 30, |
(Amounts in thousands, except per share data) | 2021 | | 2020 |
Net earnings of Flowserve Corporation | $ | 45,354 | | | $ | 6,132 | |
Dividends on restricted shares not expected to vest | 0 | | | 0 | |
Earnings attributable to common and participating shareholders | $ | 45,354 | | | $ | 6,132 | |
Weighted average shares: | | | |
Common stock | 130,279 | | | 130,148 | |
Participating securities | 26 | | | 22 | |
Denominator for basic earnings per common share | 130,305 | | | 130,170 | |
Effect of potentially dilutive securities | 499 | | | 560 | |
Denominator for diluted earnings per common share | 130,804 | | | 130,730 | |
Earnings per common share: | | | |
Basic | $ | 0.35 | | | $ | 0.05 | |
Diluted | 0.35 | | | 0.05 | |
| | | Three Months Ended September 30, | | Six Months Ended June 30, |
(Amounts in thousands, except per share data) | 2017 | | 2016 | (Amounts in thousands, except per share data) | 2021 | | 2020 |
Net earnings (loss) of Flowserve Corporation | $ | 47,605 |
| | $ | (15,841 | ) | |
Net earnings of Flowserve Corporation | | Net earnings of Flowserve Corporation | $ | 59,434 | | | $ | 18,254 | |
Dividends on restricted shares not expected to vest | — |
| | — |
| Dividends on restricted shares not expected to vest | 0 | | | 0 | |
Earnings (loss) attributable to common and participating shareholders | $ | 47,605 |
| | $ | (15,841 | ) | |
Earnings attributable to common and participating shareholders | | Earnings attributable to common and participating shareholders | $ | 59,434 | | | $ | 18,254 | |
Weighted average shares: | | | | Weighted average shares: | | | |
Common stock | 130,681 |
| | 130,299 |
| Common stock | 130,342 | | | 130,439 | |
Participating securities | 79 |
| | — |
| Participating securities | 24 | | | 24 | |
Denominator for basic earnings per common share | 130,760 |
| | 130,299 |
| Denominator for basic earnings per common share | 130,366 | | | 130,463 | |
Effect of potentially dilutive securities | 636 |
| | — |
| Effect of potentially dilutive securities | 539 | | | 689 | |
Denominator for diluted earnings per common share | 131,396 |
| | 130,299 |
| Denominator for diluted earnings per common share | 130,905 | | | 131,152 | |
Earnings (loss) per common share: | | | | |
Earnings per common share: | | Earnings per common share: | | | |
Basic | $ | 0.36 |
| | $ | (0.12 | ) | Basic | $ | 0.46 | | | $ | 0.14 | |
Diluted | 0.36 |
| | (0.12 | ) | Diluted | 0.45 | | | 0.14 | |
|
| | | | | | | |
| Nine Months Ended September 30, |
(Amounts in thousands, except per share data) | 2017 | | 2016 |
Net earnings of Flowserve Corporation | $ | 108,534 |
| | $ | 72,398 |
|
Dividends on restricted shares not expected to vest | — |
| | 5 |
|
Earnings attributable to common and participating shareholders | $ | 108,534 |
| | $ | 72,403 |
|
Weighted average shares: | | | |
Common stock | 130,574 |
| | 130,087 |
|
Participating securities | 111 |
| | 298 |
|
Denominator for basic earnings per common share | 130,685 |
| | 130,385 |
|
Effect of potentially dilutive securities | 653 |
| | 522 |
|
Denominator for diluted earnings per common share | 131,338 |
| | 130,907 |
|
Earnings per common share: | | | |
Basic | $ | 0.83 |
| | $ | 0.56 |
|
Diluted | 0.83 |
| | 0.55 |
|
Diluted earnings per share above is based upon the weighted average number of shares as determined for basic earnings per share plus shares potentially issuable in conjunction with stock options and Restricted Shares. As a result of the net loss for the three months ended September 30, 2016, we excluded 803,251 of unvested Restricted Shares from the calculation of diluted EPS due to their anti-dilutive effect.
| |
10. | Legal Matters and Contingencies |
11.Legal Matters and Contingencies
Asbestos-Related Claims
We are a defendant in a substantial number of lawsuits that seek to recover damages for personal injury allegedly caused by exposure to asbestos-containing products manufactured and/or distributed by our heritage companies in the past. Typically, these lawsuits have been brought against multiple defendants in state and federal courts. While the overall number of asbestos-related claims in which we or our predecessors have been named has generally declined in recent years, there can be no assurance that this trend will continue, or that the average cost per claim to us will not further increase. Asbestos-containing materials incorporated into any such products were encapsulated and used as internal components of process equipment, and we do not believe that any significant emission of asbestos fibers occurred during the use of this equipment.
Our practice is to vigorously contest and resolve these claims, and we have been successful in resolving a majority of claims with little or no payment. payment, other than legal fees. Activity related to asbestos claims during the periods indicated was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months | | Year Ended |
| June 30, | | June 30, | | December 31, |
| 2021 | | 2020 | | 2021 | | 2020 | | 2020 |
Beginning claims(1) | 8,445 | | | 8,282 | | | 8,366 | | | 8,345 | | | 8,345 | |
New claims | 603 | | | 456 | | | 1,232 | | | 1,037 | | | 2,140 | |
Resolved claims | (479) | | | (667) | | | (1,023) | | | (1,308) | | | (2,203) | |
Other(2) | (10) | | | 29 | | | (16) | | | 26 | | | 84 | |
Ending claims(1) | 8,559 | | | 8,100 | | | 8,559 | | | 8,100 | | | 8,366 | |
____________________
(1) Beginning and ending claims data in each period excludes inactive claims, as the Company considers it unlikely that inactive cases will be pursued further by the respective plaintiffs.A claim is classified as inactive either due to inactivity over a period of time or if designated as inactive by the applicable court.
(2) Represents the net change in claims as a result of the reclassification of active cases as inactive and inactive cases as active during the period indicated.Cases moved from active to inactive status are removed from the claims count without being accounted for as a "Resolved claim", and cases moved from inactive status to active status are added back to the claims count without being accounted for as a “New claim”.
During the three months ended June 30, 2021 the Company incurred expenses (net of insurance) of approximately $1.8 million, compared to $5.9 million for the same period in 2020 to defend, resolve or otherwise dispose of outstanding claims, including legal and other related expenses. During the six months ended June 30, 2021 the Company incurred expenses (net of insurance) of approximately $4.5 million, compared to $10.2 million for the same period in 2020 to defend, resolve or otherwise dispose of outstanding claims, including legal and other related expenses. These expenses are included within SG&A in our condensed consolidated statements of income.
The Company had cash inflows/(outflows) (net of insurance and/or indemnity) to defend, resolve or otherwise dispose of outstanding claims, including legal and other related expenses of approximately $(3.3) million and $(6.7) million during the six months ended June 30, 2021 and 2020, respectively.
Historically, a high percentage of resolved claims have been covered by applicable insurance or indemnities from other companies, and we believe that a substantial majority of existing claims should continue to be covered by insurance or indemnities. Accordingly,indemnities, in whole or in part.
We believe that our reserve for asbestos claims and the receivable for recoveries from insurance carriers that we have recorded a liability for ourthese claims reflects reasonable and probable estimates of these amounts.Our estimate of our ultimate exposure for asbestos claims, however, is subject to significant uncertainties, including the most likely settlementtiming and number and types of assertednew claims, and a related receivable from insurers or other companies for our estimated recovery, to the extent we believe that the amounts of recovery are probable and not otherwise in dispute. While unfavorable court rulings, judgments or settlement terms regardingand ultimate costs to settle.Additionally, the continued viability of carriers may also impact the amount of probable insurance recoveries.We believe that these claimsuncertainties could have a
material adverse impact on our business, financial condition, results of operations and cash flows, though we currently believe the likelihood is remote.
Additionally, we have claims pending against certain insurers that, if resolved more favorably than reflected in the recorded receivables, would result in discrete gains in the applicable quarter. We are currently unable to estimate the impact, if any, of unasserted asbestos-related claims, although future claims would also be subject to then existing indemnities and insurance coverage.
United Nations Oil-for-Food Program
In mid-2006, the French authorities began an investigation of over 170 French companies, of which one of our French subsidiaries was included, concerning suspected inappropriate activities conducted in connection with the United Nations Oil for Food Program. As previously disclosed, the French investigation of our French subsidiary was formally opened in the first quarter of 2010, and our French subsidiary filed a formal response with the French court. In July 2012, the French court ruled against our procedural motions to challenge the constitutionality of the charges and quash the indictment. Hearings occurred on April 1-2, 2015, and the Company presented its defense and closing arguments. On June 18, 2015, the French court issued its ruling dismissing the case against the Company and the other defendants. However, on July 1, 2015, the French prosecutor lodged an appeal and we anticipate that the hearing for the appeal will be held in 2018. We currently do not expect to incur additional case resolution costs of a material amount in this matter. However, if the French authorities ultimately take enforcement action against our French subsidiary regarding its investigation, we may be subject to monetary and non-monetary penalties, which we currently do not believe will have a material adverse financial impact on our company.
Other
We are currently involved as a potentially responsible party at five former public waste disposal sites in various stages of evaluation or remediation. The projected cost of remediation at these sites, as well as our alleged "fair share" allocation, will remain uncertain until all studies have been completed and the parties have either negotiated an amicable resolution or the matter has been judicially resolved. At each site, there are many other parties who have similarly been identified. Many of the other parties identified are financially strong and solvent companies that appear able to pay their share of the remediation costs. Based on our information about the waste disposal practices at these sites and the environmental regulatory process in general, we believe that it is likely that ultimate remediation liability costs for each site will be apportioned among all liable parties, including site owners and waste transporters, according to the volumes and/or toxicity of the wastes shown to have been disposed of at the sites. We believe that our financial exposure for existing disposal sites will not be materially in excess of accrued reserves.
As previously disclosed in our 2016 Annual Report, we terminated an employee of an overseas subsidiary after uncovering actions that violated our Code of Business Conduct and may have violated the Foreign Corrupt Practices Act. We completed our internal investigation into the matter, self-reported the potential violation to the United States Department of Justice (the “DOJ”) and the SEC, and continue to cooperate with the DOJ and SEC. We previously received a subpoena from the SEC requesting additional information and documentation related to the matter and have completed our response to the subpoena. We currently believe that this matter will not have a material adverse financial impact on the Company, but there can be no assurance that the Company will not be subjected to monetary penalties and additional costs. Claims
We are also a defendant in a number of other lawsuits, including product liability claims, that are insured, subject to the applicable deductibles, arising in the ordinary course of business, and we are also involved in other uninsured routine litigation incidental to our business. We currently believe none of such litigation, either individually or in the aggregate, is material to our business, operations or overall financial condition. However, litigation is inherently unpredictable, and resolutions or dispositions of claims or lawsuits by settlement or otherwise could have an adverse impact on our financial position, results of operations or cash flows for the reporting period in which any such resolution or disposition occurs.
Although none of the aforementioned potential liabilities can be quantified with absolute certainty except as otherwise indicated above, we have established or adjusted reserves covering exposures relating to contingencies, to the extent believed to be reasonably estimable and probable based on past experience and available facts. While additional exposures beyond these reserves could exist, they currently cannot be estimated. We will continue to evaluate and update the reserves as necessary and appropriate.
12.Retirement and Postretirement Benefits
| |
11. | Retirement and Postretirement Benefits |
Components of the net periodic cost for retirement and postretirement benefits for the three months ended SeptemberJune 30, 20172021 and 20162020 were as follows:
| | | U.S. Defined Benefit Plans | | Non-U.S. Defined Benefit Plans | | Postretirement Medical Benefits | | U.S. Defined Benefit Plans | | Non-U.S. Defined Benefit Plans | | Postretirement Medical Benefits |
(Amounts in millions) | 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 | (Amounts in millions) | 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 |
Service cost | $ | 5.6 |
| | $ | 5.6 |
| | $ | 1.7 |
| | $ | 1.8 |
| | $ | — |
| | $ | — |
| Service cost | $ | 5.8 | | | $ | 6.6 | | | $ | 1.9 | | | $ | 1.7 | | | $ | 0 | | | $ | 0 | |
Interest cost | 4.3 |
| | 4.8 |
| | 2.2 |
| | 2.9 |
| | 0.3 |
| | 0.3 |
| Interest cost | 2.9 | | | 3.7 | | | 1.4 | | | 1.6 | | | 0.1 | | | 0.2 | |
Expected return on plan assets | (6.2 | ) | | (6.0 | ) | | (2.1 | ) | | (2.7 | ) | | — |
| | — |
| Expected return on plan assets | (6.2) | | | (6.1) | | | (1.7) | | | (1.2) | | | 0 | | | 0 | |
Amortization of prior service cost | — |
| | 0.2 |
| | — |
| | — |
| | — |
| | — |
| Amortization of prior service cost | 0.1 | | | 0.1 | | | 0.1 | | | 0 | | | 0.1 | | | 0 | |
Amortization of unrecognized net loss (gain) | 1.5 |
| | 1.2 |
| | 0.9 |
| | 1.3 |
| | (0.1 | ) | | (0.1 | ) | Amortization of unrecognized net loss (gain) | 2.0 | | | 1.8 | | | 1.2 | | | 1.1 | | | 0 | | | 0 | |
Net periodic cost recognized | $ | 5.2 |
| | $ | 5.8 |
| | $ | 2.7 |
| | $ | 3.3 |
| | $ | 0.2 |
| | $ | 0.2 |
| Net periodic cost recognized | $ | 4.6 | | | $ | 6.1 | | | $ | 2.9 | | | $ | 3.2 | | | $ | 0.2 | | | $ | 0.2 | |
Components of the net periodic cost for retirement and postretirement benefits for the nine monthssix months ended SeptemberJune 30, 20172021 and 20162020 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Defined Benefit Plans | | Non-U.S. Defined Benefit Plans | | Postretirement Medical Benefits |
(Amounts in millions) | 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 |
Service cost | $ | 12.6 | | | $ | 12.9 | | | $ | 3.7 | | | $ | 3.4 | | | $ | 0 | | | $ | 0 | |
Interest cost | 6.0 | | | 7.5 | | | 2.8 | | | 3.2 | | | 0.2 | | | 0.3 | |
Expected return on plan assets | (12.7) | | | (12.8) | | | (3.2) | | | (2.4) | | | 0 | | | 0 | |
Amortization of prior service cost | 0.1 | | | 0.1 | | | 0.2 | | | 0.1 | | | 0.1 | | | 0.1 | |
Amortization of unrecognized net loss (gain) | 3.9 | | | 3.5 | | | 2.3 | | | 2.1 | | | 0 | | | (0.1) | |
Net periodic cost recognized | $ | 9.9 | | | $ | 11.2 | | | $ | 5.8 | | | $ | 6.4 | | | $ | 0.3 | | | $ | 0.3 | |
The components of net periodic cost for retirement and postretirement benefits other than service costs are included in other income (expense), net in our condensed consolidated statements of income.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Defined Benefit Plans | | Non-U.S. Defined Benefit Plans | | Postretirement Medical Benefits |
(Amounts in millions) | 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 |
Service cost | $ | 16.7 |
| | $ | 16.9 |
| | $ | 5.1 |
| | $ | 5.3 |
| | $ | — |
| | $ | — |
|
Interest cost | 12.7 |
| | 14.3 |
| | 6.6 |
| | 8.8 |
| | 0.7 |
| | 0.9 |
|
Expected return on plan assets | (18.4 | ) | | (18.0 | ) | | (6.3 | ) | | (8.0 | ) | | — |
| | — |
|
Amortization of prior service cost | 0.1 |
| | 0.4 |
| | — |
| | — |
| | 0.1 |
| | 0.1 |
|
Amortization of unrecognized net loss (gain) | 4.5 |
| | 3.7 |
| | 2.6 |
| | 3.7 |
| | (0.2 | ) | | (0.3 | ) |
Net periodic cost recognized | $ | 15.6 |
| | $ | 17.3 |
| | $ | 8.0 |
| | $ | 9.8 |
| | $ | 0.6 |
| | $ | 0.7 |
|
13.Shareholders’ Equity
Dividends – Generally, our dividend date-of-record is in the last month of the quarter, and the dividend is paid the following month. Any subsequent dividends will be reviewed by our Board of Directors and declared in its discretion dependent on its assessment of our financial situation and business outlook at the applicable time.discretion.
Dividends declared per share were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Dividends declared per share | $ | 0.20 | | | $ | 0.20 | | | $ | 0.40 | | | $ | 0.40 | |
Share Repurchase Program– On November 13,In 2014, our Board of Directors approved a $500.0 million share repurchase authorization. Our share repurchase program does not have an expiration date and we reserve the right to limit or terminate the repurchase program at anytimeany time without notice.
We had no repurchases ofrepurchased 311,000 shares of our outstanding common stock for $12.5 million during the three and nine months ended SeptemberJune 30, 2017 and 2016.2021, compared to no repurchases for the same period in 2020. We repurchased 440,000 shares of our outstanding common stock for $17.5 million during the six months ended June 30, 2021, compared to 1,057,115 shares repurchases for $32.1 million for the same period in 2020. As of SeptemberJune 30, 20172021, we had $160.7$101.2 million of remaining capacity under our current share repurchase program.
14.Income Taxes
For the three months ended SeptemberJune 30, 2017,2021, we earned $68.4$50.5 million before taxes and provided for income taxes of $19.6$2.7 million resulting in an effective tax rate of 28.7%5.4%. For the ninesix months ended SeptemberJune 30, 2017,2021, we earned $196.1$71.4 million before taxes and provided for income taxes of $85.8$6.5 million resulting in an effective tax rate of 43.8%9.1%. The effective tax rate varied from the U.S. federal statutory rate for the three and nine months ended SeptemberJune 30, 20172021 primarily due to the net impact of foreign operations lossesand favorable resolution of audits in foreign jurisdictions. The effective tax rate varied from the U.S. federal statutory rate for the six months ended June 30, 2021 primarily due to the net impact of foreign operations, the reversal of certain foreign jurisdictions for which nodeferred tax benefit was provided andliabilities as a result of restructuring specific aspects of our global financing arrangements, higher withholding taxes related to the saletransactions with and amongst various foreign subsidiaries and favorable resolution of the Gestra and Vogt businesses.audits in foreign jurisdictions.
For the three months ended SeptemberJune 30, 2016, we incurred a pre-tax loss of $12.2 million and provided for income taxes of $2.8 million resulting in an effective tax rate of negative 23.2%. For the nine months ended September 30, 2016,2020, we earned $123.1$12.8 million before taxes and provided for income taxes of $49.5$4.5 million resulting in an effective tax rate of 40.2%35.2%. For the six months ended June 30, 2020, we earned $64.0 million before taxes and provided for income taxes of $41.5 million resulting in an effective tax rate of 64.8%. The effective tax rate varied from the U.S. federal statutory rate for the three and nine months ended SeptemberJune 30, 20162020 primarily due to the net impact of foreign operations. The effective tax rate varied from the U.S. federal statutory rate for the six months ended June 30, 2020 primarily due to the establishment of a valuation allowance against certain deferred tax assets given the current and anticipated impact to the Company's operations resulting from the COVID-19 pandemic and the distressed oil prices, and the net impact of foreign operations.
In response to the COVID-19 pandemic, many governments have enacted or are contemplating measures to provide aid and economic stimulus. These measures may include deferring the due dates of tax payments or other changes to their income and non-income-based tax laws. The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which was enacted on March 27, 2020 in the U.S., includes measures to assist companies, including temporary changes to income and non-income-based tax laws. For the three and six months ended June 30, 2021, there were no material tax impacts fromto our Realignment Programscondensed consolidated financial statements as they relate to the CARES Act or any other global COVID-19 measures. We continue to monitor additional guidance issued by the U.S. Treasury Department, the Internal Revenue Service and losses in certain foreign jurisdictions for which no tax benefit was provided.
others.
As of SeptemberJune 30, 2017,2021, the amount of unrecognized tax benefits increaseddecreased by $3.1$3.6 million from December 31, 2016.2020. With limited exception, we are no longer subject to U.S. federal income tax audits for years through 2015,2017, state and local income tax audits for years through 20112014 or non-U.S. income tax audits for years through 2010.2013. We are currently under examination for various years in Austria, France,Canada, Germany, India, Indonesia, Italy, Singapore,Malaysia, Mexico, the Philippines, Saudi Arabia, the U.S. and Venezuela.
It is reasonably possible that within the next 12 months the effective tax rate will be impacted by the resolution of some or all of the matters audited by various taxing authorities. It is also reasonably possible that we will have the statute of limitations close in various taxing jurisdictions within the next 12 months. As such, we estimate we could record a reduction in our tax expense of approximately $8$13 million within the next 12 months.
15.Segment Information
The following is a summary of the financial information of the reportable segments reconciled to the amounts reported in the condensed consolidated financial statements:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended June 30, 2021 |
(Amounts in thousands) | FPD | | FCD | | Subtotal–Reportable Segments | | Eliminations and All Other | | Consolidated Total |
Sales to external customers | $ | 617,434 | | | $ | 280,744 | | | $ | 898,178 | | | $ | — | | | $ | 898,178 | |
Intersegment sales | 257 | | | 416 | | | 673 | | | (673) | | | — | |
Segment operating income | 67,845 | | | 37,229 | | | 105,074 | | | (32,912) | | | 72,162 | |
| | | | | | | | | |
Three Months Ended June 30, 2020 |
| FPD | | FCD | | Subtotal–Reportable Segments | | Eliminations and All Other | | Consolidated Total |
Sales to external customers | $ | 673,554 | | | $ | 251,458 | | | $ | 925,012 | | | $ | — | | | $ | 925,012 | |
Intersegment sales | 510 | | | 828 | | | 1,338 | | | (1,338) | | | — | |
Segment operating income | 60,355 | | | 26,227 | | | 86,582 | | | (43,130) | | | 43,452 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Six Months Ended June 30, 2021 |
(Amounts in thousands) | FPD | | FCD | | Subtotal–Reportable Segments | | Eliminations and All Other | | Consolidated Total |
Sales to external customers | $ | 1,219,600 | | | $ | 535,886 | | | $ | 1,755,486 | | | $ | — | | | $ | 1,755,486 | |
Intersegment sales | 733 | | | 1,096 | | | 1,829 | | | (1,829) | | | — | |
Segment operating income | 121,627 | | | 61,942 | | | 183,569 | | | (55,304) | | | 128,265 | |
| | | | | | | | | |
Six Months Ended June 30, 2020 |
| FPD | | FCD | | Subtotal–Reportable Segments | | Eliminations and All Other | | Consolidated Total |
Sales to external customers | $ | 1,308,680 | | | $ | 509,846 | | | $ | 1,818,526 | | | $ | — | | | $ | 1,818,526 | |
Intersegment sales | 1,037 | | | 1,825 | | | 2,862 | | | (2,862) | | | — | |
Segment operating income | 100,080 | | | 43,408 | | | 143,488 | | | (75,833) | | | 67,655 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended September 30, 2017 |
(Amounts in thousands) | Engineered Product Division | | Industrial Product Division | | Flow Control Division | | Subtotal–Reportable Segments | | Eliminations and All Other | | Consolidated Total |
Sales to external customers | $ | 416,031 |
| | $ | 180,347 |
| | $ | 287,002 |
| | $ | 883,380 |
| | $ | — |
| | $ | 883,380 |
|
Intersegment sales | 8,157 |
| | 9,388 |
| | 686 |
| | 18,231 |
| | (18,231 | ) | | — |
|
Segment operating income (loss) | 51,782 |
| | (3,551 | ) | | 48,497 |
| | 96,728 |
| | (22,709 | ) | | 74,019 |
|
| | | | | | | | | | | |
Three Months Ended September 30, 2016 |
(Amounts in thousands) | Engineered Product Division | | Industrial Product Division | | Flow Control Division | | Subtotal–Reportable Segments | | Eliminations and All Other | | Consolidated Total |
Sales to external customers | $ | 451,354 |
| | $ | 196,172 |
| | $ | 298,413 |
| | $ | 945,939 |
| | $ | — |
| | $ | 945,939 |
|
Intersegment sales | 7,098 |
| | 7,126 |
| | 937 |
| | 15,161 |
| | (15,161 | ) | | — |
|
Segment operating (loss) income (1) | (21,982 | ) | | (17,062 | ) | | 53,717 |
| | 14,673 |
| | (14,561 | ) | | 112 |
|
(1) Prior period amounts have been revised to reflect the correction of certain immaterial errors. See Note 2 for more information. Of the $2.9 million adjustment to consolidated operating (loss) income, $3.2 million related to the EPD segment, $(1.4) million related to the IPD segment, $0.9 million related to the FCD segment and $0.2 million related to Eliminations and All Other.
.
|
| | | | | | | | | | | | | | | | | | | | | | | |
Nine Months Ended September 30, 2017 | | | | | | | | | | |
(Amounts in thousands) | Engineered Product Division | | Industrial Product Division | | Flow Control Division | | Subtotal–Reportable Segments | | Eliminations and All Other | | Consolidated Total |
Sales to external customers | $ | 1,252,541 |
| | $ | 533,302 |
| | $ | 840,919 |
| | $ | 2,626,762 |
| | $ | — |
| | $ | 2,626,762 |
|
Intersegment sales | 24,022 |
| | 26,640 |
| | 2,608 |
| | 53,270 |
| | (53,270 | ) | | — |
|
Segment operating income (loss) | 106,902 |
| | (46,016 | ) | | 254,120 |
| | 315,006 |
| | (65,036 | ) | | 249,970 |
|
| | | | | | | | | | | |
Nine Months Ended September 30, 2016 |
(Amounts in thousands) | Engineered Product Division | | Industrial Product Division | | Flow Control Division | | Subtotal–Reportable Segments | | Eliminations and All Other | | Consolidated Total |
Sales to external customers | $ | 1,418,434 |
| | $ | 591,008 |
| | $ | 910,111 |
| | $ | 2,919,553 |
| | $ | — |
| | $ | 2,919,553 |
|
Intersegment sales | 25,763 |
| | 24,772 |
| | 5,410 |
| | 55,945 |
| | (55,945 | ) | | — |
|
Segment operating income (loss)(1) | 97,402 |
| | (10,434 | ) | | 140,541 |
| | 227,509 |
| | (62,702 | ) | | 164,807 |
|
16.Accumulated Other Comprehensive Income (Loss)
(1) Prior period amounts have been revised to reflect the correction of certain immaterial errors. See Note 2 for more information. Of the $(4.8) million adjustment to consolidated operating income (loss), $(1.1) million related to the EPD segment, $(4.3) million related to the IPD segment, $0.4 million related to the FCD segment and $0.2 million related to Eliminations and All Other.
| |
15. | Accumulated Other Comprehensive Loss |
The following table presents the changes in accumulated other comprehensive loss ("AOCL"), net of tax for the three months ended SeptemberJune 30, 20172021 and 2016:2020: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2017 | | 2016 |
(Amounts in thousands) | Foreign currency translation items(1) | | Pension and other post-retirement effects | | Cash flow hedging activity | | Total(1) | | Foreign currency translation items(1) | | Pension and other post-retirement effects | | Cash flow hedging activity | | Total(1) |
Balance - July 1 | $ | (415,506 | ) | | $ | (137,188 | ) | | $ | (1,154 | ) | | $ | (553,848 | ) | | $ | (408,605 | ) | | $ | (114,525 | ) | | $ | (2,255 | ) | | $ | (525,385 | ) |
Other comprehensive income (loss) before reclassifications | 17,674 |
| | (2,004 | ) | | 12 |
| | 15,682 |
| | (15,587 | ) | | 1,952 |
| | 39 |
| | (13,596 | ) |
Amounts reclassified from AOCL | — |
| | 1,560 |
| | — |
| | 1,560 |
| | — |
| | 1,767 |
| | 521 |
| | 2,288 |
|
Net current-period other comprehensive income (loss) | 17,674 |
| | (444 | ) | | 12 |
| | 17,242 |
| | (15,587 | ) | | 3,719 |
| | 560 |
| | (11,308 | ) |
Balance - September 30 | $ | (397,832 | ) | | $ | (137,632 | ) | | $ | (1,142 | ) | | $ | (536,606 | ) | | $ | (424,192 | ) | | $ | (110,806 | ) | | $ | (1,695 | ) | | $ | (536,693 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 | | 2020 |
(Amounts in thousands) | Foreign currency translation items(1) | | Pension and other post-retirement effects | | Cash flow hedging activity | | Total(1) | | Foreign currency translation items(1) | | Pension and other post-retirement effects | | Cash flow hedging activity | | Total(1) |
Balance - April 1 | $ | (467,326) | | | $ | (142,464) | | | $ | (286) | | | $ | (610,076) | | | $ | (537,425) | | | $ | (130,852) | | | $ | (617) | | | $ | (668,894) | |
Other comprehensive income (loss) before reclassifications | 13,998 | | | (713) | | | 15 | | | 13,300 | | | 19,048 | | | (793) | | | 44 | | | 18,299 | |
Amounts reclassified from AOCL | 0 | | | 2,772 | | | 0 | | | 2,772 | | | 0 | | | 2,551 | | | 0 | | | 2,551 | |
Net current-period other comprehensive income (loss) | 13,998 | | | 2,059 | | | 15 | | | 16,072 | | | 19,048 | | | 1,758 | | | 44 | | | 20,850 | |
Balance - June 30 | $ | (453,328) | | | $ | (140,405) | | | $ | (271) | | | $ | (594,004) | | | $ | (518,377) | | | $ | (129,094) | | | $ | (573) | | | $ | (648,044) | |
(1) Includes foreign currency translation adjustments attributable to noncontrolling interests of $3.9$6.1 million and $3.5$5.9 million at JulyApril 1, 20172021 and 2016,2020, respectively, and $3.9 $6.1 million and $3.5$5.9 million for Septemberat June 30, 20172021 and 2016,2020, respectively. Includes net investment hedge losses of $6.3 million and $2.2 million, net of deferred taxes, for the three months ended September 30, 2017 and 2016, respectively. Amounts in parentheses indicate debits.an increase to AOCL.
The following table presents the reclassifications out of AOCL:
| | | | Three Months Ended September 30, | | Three Months Ended June 30, |
(Amounts in thousands) | | Affected line item in the statement of income | | 2017(1) | | 2016 (1) | (Amounts in thousands) | | Affected line item in the statement of income | | 2021(1) | | 2020(1) |
| | | | | |
Cash flow hedging activity | | | | | |
Foreign exchange contracts | | | | | |
| | | Sales | | $ | — |
| | $ | (717 | ) | |
| | Tax benefit | | — |
| | 196 |
| |
| | Net of tax | | $ | — |
| | $ | (521 | ) | |
| | | | | |
Pension and other postretirement effects | | | | | Pension and other postretirement effects | | | | | |
Amortization of actuarial losses(2) | | $ | (2,284 | ) | | $ | (2,395 | ) | Amortization of actuarial losses(2) | | Other income (expense), net | | $ | (3,089) | | | $ | (2,857) | |
Prior service costs(2) | | (57 | ) | | (153 | ) | Prior service costs(2) | | Other income (expense), net | | (155) | | | (138) | |
| | Tax benefit | | 781 |
| | 781 |
| | Tax benefit | | 472 | | | 444 | |
| | Net of tax | | $ | (1,560 | ) | | $ | (1,767 | ) | | Net of tax | | $ | (2,772) | | | $ | (2,551) | |
(1) Amounts in parentheses indicate decreases to income. None of the reclassreclassified amounts have a noncontrolling interest component.
(2) These accumulated other comprehensive lossAOCL components are included in the computation of net periodic pension cost. See Note 1112 for additional details.
The following table presents the changes in AOCL, net of tax for the ninesix months ended SeptemberJune 30, 20172021 and 2016:2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 | | 2020 |
(Amounts in thousands) | Foreign currency translation items(1) | | Pension and other post-retirement effects | | Cash flow hedging activity | | Total(1) | | Foreign currency translation items(1) | | Pension and other post-retirement effects | | Cash flow hedging activity | | Total(1) |
Balance - January 1 | $ | (456,437) | | | $ | (146,723) | | | $ | (488) | | | $ | (603,648) | | | $ | (441,364) | | | $ | (137,161) | | | $ | (671) | | | $ | (579,196) | |
Other comprehensive (loss) income before reclassifications | 3,109 | | | 804 | | | 217 | | | 4,130 | | | (77,013) | | | 3,116 | | | 98 | | | (73,799) | |
Amounts reclassified from AOCL | 0 | | | 5,514 | | | 0 | | | 5,514 | | | 0 | | | 4,951 | | | 0 | | | 4,951 | |
Net current-period other comprehensive (loss) income | 3,109 | | | 6,318 | | | 217 | | | 9,644 | | | (77,013) | | | 8,067 | | | 98 | | | (68,848) | |
Balance - June 30 | $ | (453,328) | | | $ | (140,405) | | | $ | (271) | | | $ | (594,004) | | | $ | (518,377) | | | $ | (129,094) | | | $ | (573) | | | $ | (648,044) | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2017 | | 2016 |
(Amounts in thousands) | Foreign currency translation items(1) | | Pension and other post-retirement effects | | Cash flow hedging activity | | Total(1) | | Foreign currency translation items(1) | | Pension and other post-retirement effects | | Cash flow hedging activity | | Total(1) |
Balance - January 1 | $ | (483,609 | ) | | $ | (136,530 | ) | | $ | (1,238 | ) | | $ | (621,377 | ) | | $ | (411,615 | ) | | $ | (120,461 | ) | | $ | (3,458 | ) | | $ | (535,534 | ) |
Other comprehensive income (loss) before reclassifications | 85,225 |
| | (5,818 | ) | | 73 |
| | 79,480 |
| | (12,577 | ) | | 4,330 |
| | 633 |
| | (7,614 | ) |
Amounts reclassified from AOCL | 552 |
| | 4,716 |
| | 23 |
| | 5,291 |
| | — |
| | 5,325 |
| | 1,130 |
| | 6,455 |
|
Net current-period other comprehensive income (loss) | 85,777 |
| | (1,102 | ) | | 96 |
| | 84,771 |
| | (12,577 | ) | | 9,655 |
| | 1,763 |
| | (1,159 | ) |
Balance - September 30 | $ | (397,832 | ) | | $ | (137,632 | ) | | $ | (1,142 | ) | | $ | (536,606 | ) | | $ | (424,192 | ) | | $ | (110,806 | ) | | $ | (1,695 | ) | | $ | (536,693 | ) |
(1) Includes foreign currency translation adjustments attributable to noncontrolling interests of $3.4$5.9 million and $2.7$5.1 million at January 1, 20172021 and 20162020, respectively, and $3.9$6.1 million and $3.5$5.9 million for September at June 30, 20172021 and 2016, respectively. Includes net investment hedge losses of $19.6 million and $10.3 million,(2) net of deferred taxes, for the nine months ended September 30, 2017 and 2016,2020, respectively. Amounts in parentheses indicate debits.an increase to AOCL.
(2) Previously disclosed as a loss of $6.1 million in 2016. No incremental impact on our consolidated financial condition or result of operations.
The following table presents the reclassifications out of AOCL:
| | | | | | | | | | | | | | | | | | | | |
| | | | Six Months Ended June 30, |
(Amounts in thousands) | | Affected line item in the statement of income | | 2021(1) | | 2020(1) |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Pension and other postretirement effects | | | | | | |
Amortization of actuarial losses(2) | | Other income (expense), net | | $ | (6,148) | | | $ | (5,514) | |
Prior service costs(2) | | Other income (expense), net | | (308) | | | (279) | |
| | Tax benefit | | 942 | | | 842 | |
| | Net of tax | | $ | (5,514) | | | $ | (4,951) | |
|
| | | | | | | | | | |
| | | | Nine Months Ended September 30, |
(Amounts in thousands) | | Affected line item in the statement of income | | 2017(1) | | 2016 (1) |
Foreign currency translation items | | | | | | |
Release of cumulative translation adjustments due to sale of business(2) | | Gain on sale of business | | $ | (552 | ) | | $ | — |
|
| | Tax benefit | | — |
| | — |
|
| | Net of tax | | $ | (552 | ) | | $ | — |
|
| | | | | | |
Cash flow hedging activity | | | | | | |
Foreign exchange contracts | | | | | | |
| | Sales | | $ | (30 | ) | | $ | (1,531 | ) |
| | Tax benefit | | 7 |
| | 401 |
|
| | Net of tax | | $ | (23 | ) | | $ | (1,130 | ) |
| | | | | | |
Pension and other postretirement effects | | | | | | |
Amortization of actuarial losses(2) | | | | $ | (6,885 | ) | | $ | (7,184 | ) |
Prior service costs(2) | | | | (172 | ) | | (458 | ) |
| | Tax benefit | | 2,341 |
| | 2,317 |
|
| | Net of tax | | $ | (4,716 | ) | | $ | (5,325 | ) |
(1) Amounts in parentheses indicate decreases to income. None of the reclassreclassified amounts have a noncontrolling interest component.
(2) These accumulated other comprehensive lossAOCL components are included in the computation of net periodic pension cost. See Note 1112 for additional details.
In the first quarter of 2015, we initiated a realignment program ("R1 17.Realignment Program") to reduce and optimize certain non-strategic QRCs and manufacturing facilities. Transformation Programs
In the second quarter of 2015,2020, we identified and initiated a secondcertain realignment program ("R2 Realignment Program")activities resulting from our Flowserve 2.0 Transformation Program (defined below) to better alignright-size our organizational operations based on the current business environment, with the overall objective to reduce our workforce costs, and improve long-term efficiency, including further manufacturing optimization through the consolidation of certain facilities a reduction in our workforce, the transfer of("2020 Realignment Program"). The realignment activities from high-cost regions to lower-cost facilities and the divestiture of certain non-strategic assets.
The R1 Realignment Program and the R2 Realignment Program (collectively the "Realignment Programs") consist of both restructuring and non-restructuring charges. Restructuring charges represent costs associated with the relocation or reorganization of certain business activities and facility closures and include related severance costs. Non-restructuring charges are primarily employee severance associated with the workforce reductions to reduce redundancies.reductions. Expenses are primarily reported in COScost of sales ("COS") or selling, general and administrative ("SG&A,&A"), as applicable, in our condensed consolidated statements of income. We anticipate a total investment in these programsactivities of approximately $360$95 million including projectsand the majority of the charges were incurred in process or under final evaluation. We anticipate to incur the remaining charges throughout2020 with the remainder to be incurred through 2021. There are certain other realignment activities that are currently being evaluated, but have not yet been finalized.
In the second quarter of 20172018, we launched and into 2018.committed resources to our Flowserve 2.0 Transformation ("Flowserve 2.0 Transformation"), a program designed to transform our business model to drive operational excellence, reduce complexity, accelerate growth, improve organizational health and better leverage our existing global platform. The Flowserve 2.0 Transformation expenses incurred primarily consisted of professional services, project management and related travel costs recorded in SG&A expenses. As of December 31, 2020, the Flowserve 2.0 Transformation efforts were substantially completed. For the six months ended June 30, 2021, there were no Flowserve 2.0 Transformation charges.
Generally, the aforementioned charges will be paid in cash, except for asset write-downs, which are non-cash charges. The following is a summary of total charges, net of adjustments, incurred in 2021 related to our 2020 Realignment Program and the total charges incurred in 2020 are related to our 2020 Realignment Programs:Program and Flowserve 2.0 Transformation:
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| Three Months Ended June 30, 2021 |
(Amounts in thousands) | FPD | | FCD | | Subtotal–Reportable Segments | | All Other | | Consolidated Total |
Realignment Charges | | | | | | | | | |
Restructuring Charges | | | | | | | | | |
COS | $ | 2,016 | | | $ | 171 | | | $ | 2,187 | | | $ | 0 | | | $ | 2,187 | |
SG&A | 667 | | | 0 | | | 667 | | | 0 | | | 667 | |
| | | | | | | | | |
| $ | 2,683 | | | $ | 171 | | | $ | 2,854 | | | $ | 0 | | | $ | 2,854 | |
Non-Restructuring Charges | | | | | | | | | |
COS | $ | 1,558 | | | $ | 80 | | | $ | 1,638 | | | $ | 0 | | | $ | 1,638 | |
SG&A | 338 | | | (129) | | | 209 | | | 915 | | | 1,124 | |
| $ | 1,896 | | | $ | (49) | | | $ | 1,847 | | | $ | 915 | | | $ | 2,762 | |
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Total Realignment Charges | | | | | | | | | |
COS | $ | 3,574 | | | $ | 251 | | | $ | 3,825 | | | $ | 0 | | | $ | 3,825 | |
SG&A | 1,005 | | | (129) | | | 876 | | | 915 | | | 1,791 | |
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Total | $ | 4,579 | | | $ | 122 | | | $ | 4,701 | | | $ | 915 | | | $ | 5,616 | |
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| Three Months Ended September 30, 2017 |
(Amounts in thousands) | Engineered Product Division | | Industrial Product Division | | Flow Control Division | | Subtotal–Reportable Segments | | Eliminations and All Other | | Consolidated Total |
Restructuring Charges | | | | | | | | | | | |
COS | $ | 5,252 |
| | $ | 19 |
| | $ | 5,396 |
| | $ | 10,667 |
| | $ | — |
| | $ | 10,667 |
|
SG&A | 831 |
| | 28 |
| | 364 |
| | 1,223 |
| | (8 | ) | | 1,215 |
|
Income tax expense | 1,000 |
| | — |
| | — |
| | 1,000 |
| | — |
| | 1,000 |
|
| $ | 7,083 |
| | $ | 47 |
| | $ | 5,760 |
| | $ | 12,890 |
| | $ | (8 | ) | | $ | 12,882 |
|
Non-Restructuring Charges | |
| | |
| | |
| | | | | | |
|
COS | $ | 1,793 |
| | $ | 2,002 |
| | $ | (242 | ) | | $ | 3,553 |
| | $ | — |
| | $ | 3,553 |
|
SG&A | (113 | ) | | (407 | ) | | 658 |
| | 138 |
| | 1,218 |
| | 1,356 |
|
| $ | 1,680 |
| | $ | 1,595 |
| | $ | 416 |
| | $ | 3,691 |
| | $ | 1,218 |
| | $ | 4,909 |
|
Total Realignment Charges | | | | | | | | | | | |
COS | $ | 7,045 |
| | $ | 2,021 |
| | $ | 5,154 |
| | $ | 14,220 |
| | $ | — |
| | $ | 14,220 |
|
SG&A | 718 |
| | (379 | ) | | 1,022 |
| | 1,361 |
| | 1,210 |
| | $ | 2,571 |
|
Income tax expense | 1,000 |
| | — |
| | — |
| | 1,000 |
| | — |
| | $ | 1,000 |
|
Total | $ | 8,763 |
| | $ | 1,642 |
| | $ | 6,176 |
| | $ | 16,581 |
| | $ | 1,210 |
| | $ | 17,791 |
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| Three Months Ended June 30, 2020 |
(Amounts in thousands) | FPD | | FCD | | Subtotal–Reportable Segments | | All Other | | Consolidated Total |
Realignment Charges | | | | | | | | | |
Restructuring Charges | | | | | | | | | |
COS | $ | 11,650 | | | $ | (167) | | | $ | 11,483 | | | $ | 0 | | | $ | 11,483 | |
SG&A | 126 | | | 3 | | | 129 | | | 0 | | | 129 | |
| | | | | | | | | |
| $ | 11,776 | | | $ | (164) | | | $ | 11,612 | | | $ | 0 | | | $ | 11,612 | |
Non-Restructuring Charges | | | | | | | | | |
COS | $ | 12,003 | | | $ | 2,917 | | | $ | 14,920 | | | $ | 548 | | | $ | 15,468 | |
SG&A | 9,316 | | | 4,333 | | | 13,649 | | | 14,852 | | | 28,501 | |
| $ | 21,319 | | | $ | 7,250 | | | $ | 28,569 | | | $ | 15,400 | | | $ | 43,969 | |
Total Realignment Charges | | | | | | | | | |
COS | $ | 23,653 | | | $ | 2,750 | | | $ | 26,403 | | | $ | 548 | | | $ | 26,951 | |
SG&A | 9,442 | | | 4,336 | | | 13,778 | | | 14,852 | | | $ | 28,630 | |
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Total | $ | 33,095 | | | $ | 7,086 | | | $ | 40,181 | | | $ | 15,400 | | | $ | 55,581 | |
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Transformation Charges | | | | | | | | | |
| | | | | | | | | |
SG&A | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 5,618 | | | $ | 5,618 | |
| | | | | | | | | |
| $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 5,618 | | | $ | 5,618 | |
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Total Realignment and Transformation Charges | | | | | | | | | |
COS | $ | 23,653 | | | $ | 2,750 | | | $ | 26,403 | | | $ | 548 | | | $ | 26,951 | |
SG&A | 9,442 | | | $ | 4,336 | | | 13,778 | | | 20,470 | | | 34,248 | |
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Total | $ | 33,095 | | | $ | 7,086 | | | $ | 40,181 | | | $ | 21,018 | | | $ | 61,199 | |
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| Six Months Ended June 30, 2021 |
(Amounts in thousands) | FPD | | FCD | | Subtotal–Reportable Segments | | All Other | | Consolidated Total |
Realignment Charges | | | | | | | | | |
Restructuring Charges | | | | | | | | | |
COS | $ | 6,043 | | | $ | 470 | | | $ | 6,513 | | | $ | 0 | | | $ | 6,513 | |
SG&A | 667 | | | (9) | | | 658 | | | 0 | | | 658 | |
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| $ | 6,710 | | | $ | 461 | | | $ | 7,171 | | | $ | 0 | | | $ | 7,171 | |
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Non-Restructuring Charges | | | | | | | | | |
COS | $ | 5,449 | | | $ | 678 | | | $ | 6,127 | | | $ | 590 | | | $ | 6,717 | |
SG&A | 495 | | | 739 | | | 1,234 | | | 4,195 | | | 5,429 | |
| $ | 5,944 | | | $ | 1,417 | | | $ | 7,361 | | | $ | 4,785 | | | $ | 12,146 | |
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Total Realignment Charges | | | | | | | | | |
COS | $ | 11,492 | | | $ | 1,148 | | | $ | 12,640 | | | $ | 590 | | | $ | 13,230 | |
SG&A | 1,162 | | | 730 | | | 1,892 | | | 4,195 | | | 6,087 | |
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Total | $ | 12,654 | | | $ | 1,878 | | | $ | 14,532 | | | $ | 4,785 | | | $ | 19,317 | |
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| Three Months Ended September 30, 2016 |
(Amounts in thousands) | Engineered Product Division | | Industrial Product Division | | Flow Control Division | | Subtotal–Reportable Segments | | Eliminations and All Other | | Consolidated Total |
Restructuring Charges | | | | | | | | | | | |
COS | $ | 5,711 |
| | $ | 15,599 |
| | $ | 796 |
| | $ | 22,106 |
| | $ | — |
| | $ | 22,106 |
|
SG&A | 393 |
| | 3,928 |
| | 20 |
| | 4,341 |
| | (32 | ) | | 4,309 |
|
Income tax expense | 2,000 |
| | 2,800 |
| | 600 |
| | 5,400 |
| | — |
| | 5,400 |
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| $ | 8,104 |
| | $ | 22,327 |
| | $ | 1,416 |
| | $ | 31,847 |
| | $ | (32 | ) | | $ | 31,815 |
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Non-Restructuring Charges | |
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COS | $ | 2,707 |
| | $ | 445 |
| | $ | (749 | ) | | $ | 2,403 |
| | $ | (6 | ) | | $ | 2,397 |
|
SG&A | 1,010 |
| | (344 | ) | | 623 |
| | 1,289 |
| | 1,385 |
| | 2,674 |
|
| $ | 3,717 |
| | $ | 101 |
| | $ | (126 | ) | | $ | 3,692 |
| | $ | 1,379 |
| | $ | 5,071 |
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Total Realignment Charges | | | | | | | | | | | |
COS | $ | 8,418 |
| | $ | 16,044 |
| | $ | 47 |
| | $ | 24,509 |
| | $ | (6 | ) | | $ | 24,503 |
|
SG&A | 1,403 |
| | 3,584 |
| | 643 |
| | 5,630 |
| | 1,353 |
| | $ | 6,983 |
|
Income tax expense | 2,000 |
| | 2,800 |
| | 600 |
| | 5,400 |
| | — |
| | $ | 5,400 |
|
Total | $ | 11,821 |
| | $ | 22,428 |
| | $ | 1,290 |
| | $ | 35,539 |
| | $ | 1,347 |
| | $ | 36,886 |
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| Nine Months Ended September 30, 2017 |
(Amounts in thousands) | Engineered Product Division | | Industrial Product Division | | Flow Control Division | | Subtotal–Reportable Segments | | Eliminations and All Other | | Consolidated Total |
Restructuring Charges | | | | | | | | | | | |
COS | $ | 5,444 |
| | $ | 6,111 |
| | $ | 6,575 |
| | $ | 18,130 |
| | $ | — |
| | $ | 18,130 |
|
SG&A | 637 |
| | 213 |
| | (289 | ) | | 561 |
| | 67 |
| | 628 |
|
Income tax expense | 1,000 |
| | — |
| | — |
| | 1,000 |
| | — |
| | 1,000 |
|
| $ | 7,081 |
| | $ | 6,324 |
| | $ | 6,286 |
| | $ | 19,691 |
| | $ | 67 |
| | $ | 19,758 |
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Non-Restructuring Charges | |
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| | |
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COS | $ | 6,965 |
| | $ | 5,818 |
| | $ | 2,459 |
| | $ | 15,242 |
| | $ | — |
| | $ | 15,242 |
|
SG&A | 7,311 |
| | 9,968 |
| | 3,957 |
| | 21,236 |
| | 3,772 |
| | 25,008 |
|
| $ | 14,276 |
| | $ | 15,786 |
| | $ | 6,416 |
| | $ | 36,478 |
| | $ | 3,772 |
| | $ | 40,250 |
|
Total Realignment Charges | | | | | | | | | | | |
COS | $ | 12,409 |
| | $ | 11,929 |
| | $ | 9,034 |
| | $ | 33,372 |
| | $ | — |
| | $ | 33,372 |
|
SG&A | 7,948 |
| | 10,181 |
| | 3,668 |
| | 21,797 |
| | 3,839 |
| | 25,636 |
|
Income tax expense | 1,000 |
| | — |
| | — |
| | 1,000 |
| | — |
| | 1,000 |
|
Total | $ | 21,357 |
| | $ | 22,110 |
| | $ | 12,702 |
| | $ | 56,169 |
| | $ | 3,839 |
| | $ | 60,008 |
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| | | Nine Months Ended September 30, 2016 | | Six Months Ended June 30, 2020 |
(Amounts in thousands) | Engineered Product Division | | Industrial Product Division | | Flow Control Division | | Subtotal–Reportable Segments | | Eliminations and All Other | | Consolidated Total | (Amounts in thousands) | FPD | | FCD | | Subtotal–Reportable Segments | | All Other | | Consolidated Total |
Restructuring Charges | | | | | | | | | | | | Restructuring Charges | | | | | | | | | |
COS | $ | 10,566 |
| | $ | 17,709 |
| | $ | 3,083 |
| | $ | 31,358 |
| | $ | — |
| | $ | 31,358 |
| COS | $ | 13,331 | | | $ | (272) | | | $ | 13,059 | | | $ | 0 | | | $ | 13,059 | |
SG&A | 9,211 |
| | 5,717 |
| | 356 |
| | 15,284 |
| | — |
| | 15,284 |
| |
Income tax expense | 2,000 |
| | 2,800 |
| | 600 |
| | 5,400 |
| | — |
| | 5,400 |
| |
SG&A(1) | | SG&A(1) | 230 | | | (3) | | | 227 | | | 0 | | | 227 | |
| | $ | 21,777 |
| | $ | 26,226 |
| | $ | 4,039 |
| | $ | 52,042 |
| | $ | — |
| | $ | 52,042 |
| | $ | 13,561 | | | $ | (275) | | | $ | 13,286 | | | $ | 0 | | | $ | 13,286 | |
Non-Restructuring Charges | |
| | |
| | |
| | | | | | |
| Non-Restructuring Charges | | | | | | | | | |
COS | $ | 3,844 |
| | $ | 4,729 |
| | $ | 2,970 |
| | $ | 11,543 |
| | $ | 8 |
| | $ | 11,551 |
| COS | $ | 12,128 | | | $ | 9,242 | | | $ | 21,370 | | | $ | 548 | | | $ | 21,918 | |
SG&A | 1,989 |
| | 56 |
| | 2,212 |
| | 4,257 |
| | 2,644 |
| | 6,901 |
| SG&A | 9,801 | | | 4,384 | | | 14,185 | | | 15,497 | | | 29,682 | |
| $ | 5,833 |
| | $ | 4,785 |
| | $ | 5,182 |
| | $ | 15,800 |
| | $ | 2,652 |
| | $ | 18,452 |
| | $ | 21,929 | | | $ | 13,626 | | | $ | 35,555 | | | $ | 16,045 | | | $ | 51,600 | |
Total Realignment Charges | | | | | | | | | | | | Total Realignment Charges | | | | | | | | | |
COS | $ | 14,410 |
| | $ | 22,438 |
| | $ | 6,053 |
| | $ | 42,901 |
| | $ | 8 |
| | $ | 42,909 |
| COS | $ | 25,459 | | | $ | 8,970 | | | $ | 34,429 | | | $ | 548 | | | $ | 34,977 | |
SG&A | 11,200 |
| | 5,773 |
| | 2,568 |
| | 19,541 |
| | 2,644 |
| | 22,185 |
| SG&A | 10,031 | | | 4,381 | | | 14,412 | | | 15,497 | | | 29,909 | |
Income tax expense | 2,000 |
| | 2,800 |
| | 600 |
| | 5,400 |
| | — |
| | 5,400 |
| |
| Total | $ | 27,610 |
| | $ | 31,011 |
| | $ | 9,221 |
| | $ | 67,842 |
| | $ | 2,652 |
| | $ | 70,494 |
| Total | $ | 35,490 | | | $ | 13,351 | | | $ | 48,841 | | | $ | 16,045 | | | $ | 64,886 | |
| Transformation Charges | | Transformation Charges | |
| SG&A | | SG&A | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 11,261 | | | $ | 11,261 | |
| | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 11,261 | | | $ | 11,261 | |
| Total Realignment Charges | | Total Realignment Charges | |
COS | | COS | $ | 25,459 | | | $ | 8,970 | | | $ | 34,429 | | | $ | 548 | | | $ | 34,977 | |
SG&A | | SG&A | 10,031 | | | 4,381 | | | 14,412 | | | 26,758 | | | 41,170 | |
| Total | | Total | $ | 35,490 | | | $ | 13,351 | | | $ | 48,841 | | | $ | 27,306 | | | $ | 76,147 | |
The following is a summary of total inception to date charges, net of adjustments, related to the 2020 Realignment Programs:Program:
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| Inception to Date |
(Amounts in thousands) | FPD | | FCD | | Subtotal–Reportable Segments | | All Other | | Consolidated Total |
Realignment Charges | | | | | | | | | |
Restructuring Charges | | | | | | | | | |
COS | $ | 23,872 | | | $ | 1,697 | | | $ | 25,569 | | | $ | 0 | | | $ | 25,569 | |
SG&A | 718 | | | 316 | | | 1,034 | | | 0 | | | 1,034 | |
| | | | | | | | | |
| $ | 24,590 | | | $ | 2,013 | | | $ | 26,603 | | | $ | 0 | | | $ | 26,603 | |
Non-Restructuring Charges | | | | | | | | | |
COS | $ | 24,653 | | | $ | 205 | | | $ | 24,858 | | | $ | 642 | | | $ | 25,500 | |
SG&A | 11,176 | | | 5,293 | | | 16,469 | | | 22,077 | | | 38,546 | |
| $ | 35,829 | | | $ | 5,498 | | | $ | 41,327 | | | $ | 22,719 | | | $ | 64,046 | |
Total Realignment Charges | | | | | | | | | |
COS | $ | 48,525 | | | $ | 1,902 | | | $ | 50,427 | | | $ | 642 | | | $ | 51,069 | |
SG&A | 11,894 | | | 5,609 | | | 17,503 | | | 22,077 | | | 39,580 | |
| | | | | | | | | |
Total | $ | 60,419 | | | $ | 7,511 | | | $ | 67,930 | | | $ | 22,719 | | | $ | 90,649 | |
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| Inception to Date |
(Amounts in thousands) | Engineered Product Division | | Industrial Product Division (1) | | Flow Control Division | | Subtotal–Reportable Segments | | Eliminations and All Other | | Consolidated Total |
Restructuring Charges | | | | | | | | | | | |
COS | $ | 40,155 |
| | $ | 46,759 |
| | $ | 20,564 |
| | $ | 107,478 |
| | $ | — |
| | $ | 107,478 |
|
SG&A | 18,454 |
| | 15,811 |
| | 9,262 |
| | 43,527 |
| | 85 |
| | 43,612 |
|
Income tax expense(2) | 10,400 |
| | 9,300 |
| | 1,800 |
| | 21,500 |
| | — |
| | 21,500 |
|
| $ | 69,009 |
| | $ | 71,870 |
| | $ | 31,626 |
| | $ | 172,505 |
| | $ | 85 |
| | $ | 172,590 |
|
Non-Restructuring Charges | |
| | |
| | |
| | | | | | |
|
COS | $ | 23,125 |
| | $ | 20,000 |
| | $ | 14,392 |
| | $ | 57,517 |
| | $ | 8 |
| | $ | 57,525 |
|
SG&A | 17,304 |
| | 18,177 |
| | 8,796 |
| | 44,277 |
| | 8,205 |
| | 52,482 |
|
| $ | 40,429 |
| | $ | 38,177 |
| | $ | 23,188 |
| | $ | 101,794 |
| | $ | 8,213 |
| | $ | 110,007 |
|
Total Realignment Charges | | | | | | | | | | | |
COS | $ | 63,280 |
| | $ | 66,759 |
| | $ | 34,956 |
| | $ | 164,995 |
| | $ | 8 |
| | $ | 165,003 |
|
SG&A | 35,758 |
| | 33,988 |
| | 18,058 |
| | 87,804 |
| | 8,290 |
| | 96,094 |
|
Income tax expense(2) | 10,400 |
| | 9,300 |
| | 1,800 |
| | 21,500 |
| | — |
| | 21,500 |
|
Total | $ | 109,438 |
| | $ | 110,047 |
| | $ | 54,814 |
| | $ | 274,299 |
| | $ | 8,298 |
| | $ | 282,597 |
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____________________________
(2) Income tax expense includes exit taxes as well as non-deductible costs.
Restructuring charges represent costs associated with the relocation or reorganization of certain business activities and facility closures and include costs related to employee severance at closed facilities, contract termination costs, asset write-downs and other costs. Severance costs primarily include costs associated with involuntary termination benefits. Contract termination costs include costs related to the termination of operating leases or other contract termination costs. Asset write-downs include accelerated depreciation of fixed assets, accelerated amortization of intangible assets, divestiture of certain non-strategic assets and inventory write-downs. Other costs generally include costs related to employee relocation, asset relocation, vacant facility costs (i.e., taxes and insurance) and other charges.
The following is a summary of restructuring charges, net of adjustments, for theour restructuring activities related to our 2020 Realignment Programs:Program:
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| Three Months Ended June 30, 2021 |
(Amounts in thousands) | Severance | | Contract Termination | | Asset Write-Downs | | Other | | Total |
| | | | | | | | | |
COS | $ | (154) | | | $ | 0 | | | $ | (849) | | | $ | 3,190 | | | $ | 2,187 | |
SG&A | 168 | | | 0 | | | 0 | | | 499 | | | 667 | |
| | | | | | | | | |
Total | $ | 14 | | | $ | 0 | | | $ | (849) | | | $ | 3,689 | | | $ | 2,854 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2020 |
(Amounts in thousands) | Severance | | Contract Termination | | Asset Write-Downs | | Other | | Total |
COS | $ | 10,572 | | | $ | 0 | | | $ | 994 | | | $ | (83) | | | $ | 11,483 | |
SG&A | 126 | | | 0 | | | 3 | | | 0 | | | 129 | |
| | | | | | | | | |
Total | $ | 10,698 | | | $ | 0 | | | $ | 997 | | | $ | (83) | | | $ | 11,612 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2021 |
(Amounts in thousands) | Severance | | Contract Termination | | Asset Write-Downs | | Other | | Total |
COS | $ | 1,219 | | | $ | 0 | | | $ | 1,341 | | | $ | 3,953 | | | $ | 6,513 | |
SG&A | 168 | | | 0 | | 0 | | | 490 | | | 658 | |
| | | | | | | | | |
Total | $ | 1,387 | | | $ | 0 | | | $ | 1,341 | | | $ | 4,443 | | | $ | 7,171 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2020 |
(Amounts in thousands) | Severance | | Contract Termination | | Asset Write-Downs | | Other | | Total |
COS | $ | 12,255 | | | $ | 0 | | | $ | 991 | | | $ | (187) | | | $ | 13,059 | |
SG&A | 265 | | | 0 | | | 0 | | | (38) | | | 227 | |
| | | | | | | | | |
Total | $ | 12,520 | | | $ | 0 | | | $ | 991 | | | $ | (225) | | | $ | 13,286 | |
|
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2017 |
(Amounts in thousands) | Severance | | Contract Termination | | Asset Write-Downs | | Other | | Total |
COS | $ | 9,197 |
| | $ | — |
| | $ | 59 |
| | $ | 1,411 |
| | $ | 10,667 |
|
SG&A | 440 |
| | — |
| | 52 |
| | 723 |
| | 1,215 |
|
Income tax expense | — |
| | — |
| | — |
| | 1,000 |
| | 1,000 |
|
Total | $ | 9,637 |
| | $ | — |
| | $ | 111 |
| | $ | 3,134 |
| | $ | 12,882 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2016 |
(Amounts in thousands) | Severance | | Contract Termination | | Asset Write-Downs | | Other | | Total |
COS | $ | 19,674 |
| | $ | — |
| | $ | 1,309 |
| | $ | 1,123 |
| | $ | 22,106 |
|
SG&A | 2,948 |
| | — |
| | 66 |
| | 1,295 |
| | 4,309 |
|
Income tax expense | — |
| | — |
| | — |
| | 5,400 |
| | 5,400 |
|
Total | $ | 22,622 |
| | $ | — |
| | $ | 1,375 |
| | $ | 7,818 |
| | $ | 31,815 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2017 |
(Amounts in thousands) | Severance | | Contract Termination | | Asset Write-Downs | | Other | | Total |
COS | $ | 4,978 |
| | $ | 226 |
| | $ | 5,210 |
| | $ | 7,716 |
| | $ | 18,130 |
|
SG&A | (1,377 | ) | | — |
| | 242 |
| | 1,763 |
| | 628 |
|
Income tax expense | — |
| | — |
| | — |
| | 1,000 |
| | 1,000 |
|
Total | $ | 3,601 |
| | $ | 226 |
| | $ | 5,452 |
| | $ | 10,479 |
| | $ | 19,758 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2016 |
(Amounts in thousands) | Severance | | Contract Termination | | Asset Write-Downs | | Other | | Total |
COS | $ | 22,975 |
| | $ | — |
| | $ | 3,853 |
| | $ | 4,530 |
| | $ | 31,358 |
|
SG&A | 5,036 |
| | — |
| | 103 |
| | 10,145 |
| | 15,284 |
|
Income tax expense | — |
| | — |
| | — |
| | 5,400 |
| | 5,400 |
|
Total | $ | 28,011 |
| | $ | — |
| | $ | 3,956 |
| | $ | 20,075 |
| | $ | 52,042 |
|
The following is a summary of total inception to date restructuring charges, net of adjustments, related to theour 2020 Realignment Programs:Program:
|
| | | | | | | | | | | | | | | | | | | |
| Inception to Date |
(Amounts in thousands) | Severance | | Contract Termination | | Asset Write-Downs | | Other | | Total (1) |
COS(1) | $ | 76,922 |
| | $ | 834 |
| | $ | 14,127 |
| | $ | 15,595 |
| | $ | 107,478 |
|
SG&A | 29,390 |
| | 43 |
| | 1,671 |
| | 12,508 |
| | 43,612 |
|
Income tax expense(2) | — |
| | — |
| | — |
| | 21,500 |
| | 21,500 |
|
Total | $ | 106,312 |
| | $ | 877 |
| | $ | 15,798 |
| | $ | 49,603 |
| | $ | 172,590 |
|
(1) Includes $48.2 million of restructuring charges, primarily COS, related to the R1 Realignment Program.
(2) Income tax expense includes exit taxes as well as non-deductible costs.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Inception to Date |
(Amounts in thousands) | Severance | | Contract Termination | | Asset Write-Downs | | Other | | Total |
COS | $ | 16,463 | | | $ | 52 | | | $ | 2,753 | | | $ | 6,301 | | | $ | 25,569 | |
SG&A | 252 | | | 0 | | | 14 | | | 768 | | | 1,034 | |
| | | | | | | | | |
Total | $ | 16,715 | | | $ | 52 | | | $ | 2,767 | | | $ | 7,069 | | | $ | 26,603 | |
The following represents the activity, primarily severance charges from reductions in force, related to the restructuring reservereserves for the Realignment Programs for the ninesix months ended SeptemberJune 30, 20172021 and 2016:2020:
| | | | | | | | | | | |
(Amounts in thousands) | 2021 | | 2020 |
Balance at January 1 | $ | 18,255 | | | $ | 6,703 | |
Charges, net of adjustments | 5,830 | | | 12,270 | |
Cash expenditures | (14,388) | | | (2,713) | |
Other non-cash adjustments, including currency | (461) | | | (118) | |
Balance at June 30 | $ | 9,236 | | | $ | 16,142 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| 2017 | | 2016 |
(Amounts in thousands) | R1 Realignment Program | | R2 Realignment Program | | Total | | R1 Realignment Program | | R2 Realignment Program | | Total |
Balance at December 31 | $ | 12,594 |
| | $ | 47,733 |
| | $ | 60,327 |
| | $ | 25,156 |
| | $ | 33,147 |
| | $ | 58,303 |
|
Charges, net of adjustments | (3,425 | ) | | 16,501 |
| | 13,076 |
| | 7,919 |
| | 28,316 |
| | 36,235 |
|
Cash expenditures | (10,542 | ) | | (15,946 | ) | | (26,488 | ) | | (5,131 | ) | | (22,886 | ) | | (28,017 | ) |
Other non-cash adjustments, including currency | 3,378 |
| | (7,940 | ) | | (4,562 | ) | | (7,695 | ) | | (864 | ) | | (8,559 | ) |
Balance at September 30 | $ | 2,005 |
| | $ | 40,348 |
| | $ | 42,353 |
| | $ | 20,249 |
| | $ | 37,713 |
| | $ | 57,962 |
|
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations.
| |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and notes thereto, and the other financial data included elsewhere in this Quarterly Report. The following discussion should also be read in conjunction with our audited consolidated financial statements, and notes thereto, and "Management’s Discussion and Analysis of Financial Condition and Results of Operations" ("MD&A") included in our 20162020 Annual Report.
EXECUTIVE OVERVIEW
Our Company
We believe that we are a world-leading manufacturer and aftermarket service provider of comprehensive flow control systems. We develop and manufacture precision-engineered flow control equipment integral to the movement, control and protection of the flow of materials in our customers’ critical processes. Our product portfolio of pumps, valves, seals, automation and aftermarket services supports global infrastructure industries, including oil and gas, chemical, power generation and water management, as well as general industrial markets where our products and services add value. Through our manufacturing platform and global network of Quick Response Centers ("QRCs"), we offer a broad array of aftermarket equipment services, such as installation, advanced diagnostics, repair and retrofitting. We currently employ approximately 17,000approximately 15,000 employees in more than 50 countries.countries.
Our business model is significantly influenced by the capital and operating spending of global infrastructure industries for the placement of new products into service and aftermarket services for existing operations. The worldwide installed base of our products is an important source of aftermarket revenue, where products are expected to ensure the maximum operating time of many key industrial processes. Over the past several years, weWe have significantly invested in our aftermarket strategy to provide local support to drive customer investments in our offerings and use of our services to replace or repair installed products. The aftermarket portion of our business also helps provide business stability during various economic periods. The aftermarket service and solutions business, which is primarily served by our networknetwork of 177 162 QRCs located around the globe, provides a variety of service offerings for our customers including spare parts, service solutions, product life cycle solutions and other value-added services. It is generally a higher margin business compared to our original equipment business and a key component of our profitable growthbusiness strategy.
Our operations are conducted through threetwo business segments that are referenced throughout this MD&A:
EPD for long lead-time,•Flowserve Pump Division ("FPD") designs and manufactures custom, and other highly-engineered pumps, andpre-configured industrial pumps, pump systems, mechanical seals, auxiliary systems and replacement parts and related services; and
IPD for engineered•Flow Control Division ("FCD") designs, manufactures and pre-configured industrial pumpsdistributes a broad portfolio of engineered-to-order and pump systems and related products and services; and
FCD for engineered and industrialconfigured-to-order isolation valves, control valves, actuators and controlsvalve automation products and related services.equipment.
Our business segments share a focus on industrial flow control technology and have a high number of common customers. These segments also have complementary product offerings and technologies that are often combined in applications that provide us a net competitive advantage. Our segments also benefit from our global footprint and our economies of scale in reducing administrative and overhead costs to serve customers more cost effectively. For example, our segments share leadership for operational support functions, such as sales, research and development, marketing and supply chain.
The reputation of our product portfolio is built on more than 50 well-respected brand names such as Worthington, IDP, Valtek, Limitorque, Durco, Argus, Edward, Anchor/Darling, SIHI, HalbergValbart and Durametallic, which we believe to be one of the most comprehensive in the industry. Our products and services are sold either directly or through designated channels to more than 10,000 companies, including some of the world’s leading engineering, procurement and construction ("EPC") firms, original equipment manufacturers, distributors and end users.
We continue to leverage our QRC network to be positioned as near to customers as possible for service and support in order to capture valuable aftermarket business. Along with ensuring that we havemaintaining the local capability to sell, install and service our equipment in remote regions, it is equally imperative to continuously improve our global operations. WeDespite headwinds caused by the COVID-19 pandemic, we continue to expandenhance our global supply chain capabilitycapabilities to continue to increase our ability to meet global customer demands and ensureimprove the quality and timely delivery of our products.products over the long-term. Additionally, we continue to devote resources to improvingimprove the supply chain processes across our business segments toand find areas of synergy and cost reduction, and to improveall along improving our supply chain management capability to ensure it can meet global customer demands. We also remain focused on improving on-time delivery and quality, while managing warranty costs as a percentage of sales across our global operations, through the assistance of a focused Continuous Improvement Process ("CIP") initiative.The goal of the CIP initiative, which includes lean manufacturing, six sigma business management strategy and value engineering, is to maximize service fulfillment to customers through on-time delivery, reduced cycle time and quality at the highest internal productivity.
COVID-19 Update
Our cross-functional crisis management team established during the first quarter of 2020 has continued monitoring and making recommendations to management to help us continue operating as an essential business, while also protecting the health and safety of our associates. We expect that widespread implications of the pandemic worldwide will continue to cause substantial economic uncertainty and challenging operational conditions throughout 2021.We continue to actively monitor the impacts of the COVID-19 pandemic on all aspects of our business and geographies.
While we cannot reasonably estimate with certainty the duration and severity of the COVID-19 pandemic or its ultimate impact on the global economy, our business or our financial condition and results, we nonetheless remain committed to providing the critical support, products and services that our customers rely on, and currently believe that we will emerge from these events well positioned for long-term growth.
Health and Safety of Our Associates
The health and safety of our associates, suppliers and customers around the world continues to be a priority as we navigate the COVID-19 pandemic, including recent spikes in cases of the virus and its variants in various geographies in which we operate. We are incredibly proud of the great teamwork exhibited by our global workforce who have demonstrated strong resilience in adapting to continually evolving health and safety guidelines while addressing these challenging times and providing products and services to our customers.
At the beginning of the pandemic we implemented policies and practices to help protect our workforce so they can safely and effectively carry out their vital work, and we have continued to revise those policies and practices in light of guidance received from local and regional health authorities where appropriate. In those locations where employees are going to work in our facilities, including our global headquarters in Irving, Texas, which began a phased reopening during the second quarter of 2021, we continue taking steps, consistent with guidelines from local and global health experts to protect our employees so that we can continue operations and manufacture critical technologies and equipment, including providing face coverings and other personal protective equipment, enhanced cleaning of sites and implemented social distancing protocols.
Our employees and facilities have a key role in keeping essential infrastructure and industries operating, including oil and gas, water, chemical, power generation and other essential industries, such as food and beverage and healthcare. While some of
our facilities have experienced periods of temporary closures in accordance with decrees, orders and laws in their respective countries and geographies, many of which occurred at the onset of the pandemic, as of August 5, 2021, all of our facilities are open and operational, and are running close to pre-COVID-19 levels as we continue to make essential products and provide services for our customers. While the measures described above, combined with continued employee costs and under-absorption of manufacturing costs as a result of temporary closures and work-from-home policies, have had and are expected to continue having an adverse impact on our financial performance throughout the remainder of the pandemic, we have seen these adverse impacts begin to decline as the roll out of vaccines has improved around the world, and we expect a further decline of these adverse impacts and as we navigate further through the pandemic in 2021.
Customer Demand
During the first ninesix months of 2017, our financial results2021, the ongoing effects of the COVID-19 pandemic in global markets has continued to be challenged by capital spending declines, primarilyadversely impact our customers, particularly in the oil and gas industry and pricing pressures. Although there has been stability inmarkets. As a result of the pandemic’s effect (among certain other effects) on oil prices over recent quarters,during 2020, many of our large customers reduced capital expenditures and budgets last year. To date, while we anticipatehave seen some modest improvement, customer spending has yet to return to pre-pandemic levels. As a result, while bookings in the first six months of 2021 continued to be lower than pre-pandemic levels, we saw an overall increase in bookings of 6.3% in the first six months of 2021 as compared to the same period in 2020.
While we expect that many of the current environmentrepair and maintenance projects that were paused by our customers last year as a result of the pandemic will persist throughout 2017.ultimately need to be completed, the timing will largely depend on the duration of the COVID-19 pandemic and how the virus continues to spread in our customers’ various geographies. While we have seen some recovery in capital expenditure budgets and, therefore, our bookings, during the first half of 2021, we do not expect planned capital spending to approach pre-pandemic levels in 2021.
To better alignSupply Chain Impact
Since the onset of the pandemic, many of our suppliers have also experienced varying lengths of production and shipping delays related to the COVID-19 pandemic, some of which continue to exist in highly affected countries. These conditions have had an adverse effect on the speed at which we can manufacture and ship our products to customers, and have also led to an increase in logistics, transportation and freight costs, requiring that we diversify our supply chain and, in some instances, source materials from new suppliers. Additionally, these conditions have in some cases impacted our ability to deliver products to customers on time, which has in turn led to an increase in backlog at some of our manufacturing sites. Though some of these issues have abated as the pandemic has progressed, certain disruptions in our supply chain and their effects have continued and we expect they will continue as the COVID-19 pandemic continues.
Operational Impacts
We continue to engage in a number of cost savings measures in order to help mitigate certain of the adverse effects of the COVID-19 pandemic on our financial results, including certain realignment activities (further described below under “—RESULTS OF OPERATIONS – Three and six months ended June 30, 2021 and 2020”), reductions in capital expenditures and continued cuts in other discretionary spending due to our response to the effects of COVID-19, which partially offsets the continued costs and improve long-term efficiency, we initiated Realignment Programs to accelerate both short- and long-term strategic plans, including targeted manufacturing optimization through the consolidation of facilities, SG&A efficiency initiatives, transfer of activities from high-cost regions to lower-cost facilities and the divestiture of certain non-strategic assets. At the completionoperational impacts of the programs,safety protocols and procedures that we have implemented and sustained as described above under the heading "Health and Safety of Our Associates." We continue to evaluate additional cost savings measures in order to reduce the impact of the COVID-19 pandemic on our financial results.
We continually monitor and assess the spread of COVID-19 and known variants, including in areas that have seen recent increases in cases, and we will continue to adapt our operations to respond the changing conditions as needed. As we continue to manage our business through this unprecedented time of uncertainty and market volatility, we will remain focused on the health and safety of our associates, suppliers, customers, and will continue to provide essential products and services to our customers.
2021 Outlook
As of June 30, 2021, we had approximately $1.4 billion of liquidity, consisting of cash and cash equivalents of $630.4 million and $738.9 million of borrowings available under our Senior Credit Facility. We will continue to actively monitor the potential impacts of COVID-19 and related events on the credit markets in order to maintain sufficient liquidity and access to capital throughout 2021. As the world continues to make progress against COVID-19 largely through increased vaccinations, we have begun to see an inflection in our served end-markets as commodity prices and mobility levels increase. As such, we expect an approximately 20% reductionfull-year bookings in our global workforce, relative2021 to early 2015 workforceincrease over 10% compared to 2020 levels. With an expected near-term investment
RESULTS OF OPERATIONS — Three and nine months ended SeptemberJune 30, 20172021 and 20162020
Throughout this discussion of our results of operations, we discuss the impact of fluctuations in foreign currency exchange rates. We have calculated currency effects on operations by translating current year results on a monthly basis at prior year exchange rates for the same periods.
AsDuring the first quarter of 2021, as previously disclosed, in our Quarterly Report on Form 10-Q forwe identified an accounting error involving foreign currency transactions beginning with the quarterly periodfirst quarter of 2020 through the year ended June 30, 2017,December 31, 2020. These adjustments increased retirement obligations and other liabilities by $1.5 million, retained earnings by $14.0 million and accumulated other comprehensive loss by $15.5 million as of December 31, 2020.
In addition, as previously disclosed, during the third quarter of 2020, we identified accounting errors focused mainly at tworelated to the recognition of our non-U.S. sites ina liability for unasserted asbestos claims. The adjustments primarily related to an incurred but not reported ("IBNR") liability associated with unasserted asbestos claims, but also included adjustments related to the inventory, accounts receivable, costassociated receivables for expected insurance proceeds for asbestos settlement and defense costs from insurance coverage and the recognition as an expense the related legal fees that were previously estimated to be recoverable from insurance carriers for which coverage is not currently sufficient following the recognition of sales and selling, general and administrative balancesthe IBNR for prior periods beginning with the year ended December 31, 2014 through the firstsecond quarter of 2017. 2020 and to correct certain other previously identified immaterial errors.
We have assessed thesethe above described errors, individually and in the aggregate, and concluded that they were not material to any prior annual or interim period. However, to facilitate comparisons among periods we revised our previously issued audited consolidated financial information which is included in our 2016 Annual Report and unaudited condensed consolidated financial information for the interim periods included in our Form 10-Q/A and Form 10-Q for the quartersperiod ended March 31, 2017 and June 30, 2017, respectively. We also corrected2020 or any previous period. The June 30, 2020, balances, as presented herein, have been revised. Additionally, the timing of immaterial previously recorded out-of-period adjustments and reflected themremaining periods in 2020 will be revised the revised prior periodnext time such financial statements whereare filed as applicable. Refer to Note 2 to our condensed consolidated financial statements included in this Quarterly Report for more information.
As discussed in Note 3 to our condensed consolidated financial statements included in this Quarterly Report, effective July 6, 2017, we sold our Flow Control Division's ("FCD") Vogt product line and related assets and liabilities to a privately held company. In 2016, net salesdetailed discussion related to the Vogt business totaled approximately $17 million, with earnings before interestimpact of the revision as of and taxesfor the three and six months ended June 30, 2020 and the impact to future periods in 2020 which will be revised in future filings.
In the second quarter of approximately $4 million.
As discussed in Note 32018, we launched and committed resources to our condensed consolidated financial statements included in this Quarterly Report, effective May 2, 2017 we soldFlowserve 2.0 Transformation, a program designed to transform our FCD Gestra AG business model to a leading provider of steam system solutions. In 2016, Gestra recorded revenues of approximately $101 million (€92 million) with earnings before interestdrive operational excellence, reduce complexity, accelerate growth, improve organizational health and taxes of approximately $17 million (€15 million).
In 2015, we initiated Realignment Programs that consist of both restructuring and non-restructuring charges that arebetter leverage our existing global platform, which is further discussed in Note 1617 to our condensed consolidated financial statements included in this Quarterly Report. The Realignment Programs will continue throughout 2017Flowserve 2.0 Transformation expenses incurred primarily consist of professional services, project management and related travel costs recorded in SG&A expenses. As of December 31, 2020, the total charges for Realignment Programs by segment are detailed below forFlowserve 2.0 Transformation efforts were substantially complete.
In the three months ended September 30, 2017second quarter of 2020, we identified and 2016:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2017 |
(Amounts in thousands) | Engineered Product Division | | Industrial Product Division | | Flow Control Division | | Subtotal–Reportable Segments | | Eliminations and All Other | | Consolidated Total |
Total Realignment Program Charges | | | | | | | | | | | |
COS | $ | 7,045 |
| | $ | 2,021 |
| | $ | 5,154 |
| | $ | 14,220 |
| | $ | — |
| | $ | 14,220 |
|
SG&A | 718 |
| | (379 | ) | | 1,022 |
| | 1,361 |
| | 1,210 |
| | 2,571 |
|
Income tax expense | 1,000 |
| | — |
| | — |
| | 1,000 |
| | — |
| | 1,000 |
|
Total | $ | 8,763 |
| | $ | 1,642 |
| | $ | 6,176 |
| | $ | 16,581 |
| | $ | 1,210 |
| | $ | 17,791 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2016 |
(Amounts in thousands) | Engineered Product Division | | Industrial Product Division | | Flow Control Division | | Subtotal–Reportable Segments | | Eliminations and All Other | | Consolidated Total |
Total Realignment Program Charges | | | | | | | | | | | |
COS | $ | 8,418 |
| | $ | 16,044 |
| | $ | 47 |
| | $ | 24,509 |
| | $ | (6 | ) | | $ | 24,503 |
|
SG&A | 1,403 |
| | 3,584 |
| | 643 |
| | 5,630 |
| | 1,353 |
| | 6,983 |
|
Income tax expense | 2,000 |
| | 2,800 |
| | 600 |
| | 5,400 |
| | — |
| | 5,400 |
|
Total | $ | 11,821 |
| | $ | 22,428 |
| | $ | 1,290 |
| | $ | 35,539 |
| | $ | 1,347 |
| | $ | 36,886 |
|
The total charges for Realignment Programs by segment are detailed below forinitiated certain realignment activities resulting from our Flowserve 2.0 Transformation Program to right-size our organizational operations based on the nine months ended September 30, 2017 and 2016:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2017 |
(Amounts in thousands) | Engineered Product Division | | Industrial Product Division | | Flow Control Division | | Subtotal–Reportable Segments | | Eliminations and All Other | | Consolidated Total |
Total Realignment Program Charges | | | | | | | | | | | |
COS | $ | 12,409 |
| | $ | 11,929 |
| | $ | 9,034 |
| | $ | 33,372 |
| | $ | — |
| | $ | 33,372 |
|
SG&A | 7,948 |
| | 10,181 |
| | 3,668 |
| | 21,797 |
| | 3,839 |
| | 25,636 |
|
Income tax expense | 1,000 |
| | — |
| | — |
| | 1,000 |
| | — |
| | 1,000 |
|
Total | $ | 21,357 |
| | $ | 22,110 |
| | $ | 12,702 |
| | $ | 56,169 |
| | $ | 3,839 |
| | $ | 60,008 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2016 |
(Amounts in thousands) | Engineered Product Division | | Industrial Product Division | | Flow Control Division | | Subtotal–Reportable Segments | | Eliminations and All Other | | Consolidated Total |
Total Realignment Program Charges | | | | | | | | | | | |
COS | $ | 14,410 |
| | $ | 22,438 |
| | $ | 6,053 |
| | $ | 42,901 |
| | $ | 8 |
| | $ | 42,909 |
|
SG&A | 11,200 |
| | 5,773 |
| | 2,568 |
| | 19,541 |
| | 2,644 |
| | 22,185 |
|
Income tax expense | 2,000 |
| | 2,800 |
| | 600 |
| | 5,400 |
| | — |
| | 5,400 |
|
Total | $ | 27,610 |
| | $ | 31,011 |
| | $ | 9,221 |
| | $ | 67,842 |
| | $ | 2,652 |
| | $ | 70,494 |
|
current business environment, with the overall objective to reduce our workforce costs. We anticipate a total investment in these2020 Realignment ProgramsProgram activities of approximately $360$95 million including projects in process or under final evaluation. Since inceptionand the majority of the Realignment Programscharges were incurred in 2015, we have2020 with the remainder to be incurred charges of $282.6 million and we expect to incur the remaining charges throughoutthrough the remainder of 2017 and into 2018.
Based2021. Based on the actions under ourinitiated with the 2020 Realignment Programs,Program, we estimate that we have achieved cost savings of approximately $150$49 million for the ninesix months ended SeptemberJune 30, 2017, as compared2021, with $80 million in the same period of 2016. Approximately $95approximately $25 million of those savings are in COS with the remainderand approximately $24 million in SG&A. Upon completion of the 2020 Realignment Programs,Program activities, we expect full year run-rate cost savings of approximately $230 million, of which approximately $214 million would be achieved in 2017. $125 million. Actual savings could vary from expected savings, which represent management’s best estimate to date. There are certain other realignment activities that are currently being evaluated, but have not yet been finalized.
Realignment Activity
The following tables present out realignment activity by segment related to our 2020 Realignment Program. For the three and six months ended June 30, 2021, the total charges incurred are related to our 2020 Realignment Program and there were no Flowserve 2.0 Transformation charges. For the three and six months ended June 30, 2020, the total charges incurred are related to our 2020 Realignment Program and Flowserve 2.0 Transformation:
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| Three Months Ended June 30, 2021 |
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(Amounts in thousands) | FPD | | FCD | | Subtotal–Reportable Segments | | Eliminations and All Other | | Consolidated Total |
Total Realignment Charges | | | | | | | | | |
COS | $ | 3,574 | | | $ | 251 | | | $ | 3,825 | | | $ | — | | | $ | 3,825 | |
SG&A | 1,005 | | | (129) | | | 876 | | | 915 | | | 1,791 | |
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Total | $ | 4,579 | | | $ | 122 | | | $ | 4,701 | | | $ | 915 | | | $ | 5,616 | |
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| Three Months Ended June 30, 2020 |
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(Amounts in thousands) | FPD | | FCD | | Subtotal–Reportable Segments | | Eliminations and All Other | | Consolidated Total |
Total Realignment and Transformation Charges | | | | | | | | | |
COS | $ | 23,653 | | | $ | 2,750 | | | $ | 26,403 | | | $ | 548 | | | $ | 26,951 | |
SG&A | 9,442 | | | $ | 4,336 | | | 13,778 | | | 20,470 | | | 34,248 | |
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Total | $ | 33,095 | | | $ | 7,086 | | | $ | 40,181 | | | $ | 21,018 | | | $ | 61,199 | |
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| Six Months Ended June 30, 2021 |
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(Amounts in thousands) | FPD | | FCD | | Subtotal–Reportable Segments | | Eliminations and All Other | | Consolidated Total |
Total Realignment and Transformation Charges | | | | | | | | | |
COS | $ | 11,492 | | | $ | 1,148 | | | $ | 12,640 | | | $ | 590 | | | $ | 13,230 | |
SG&A | 1,162 | | | $ | 730 | | | 1,892 | | | 4,195 | | | 6,087 | |
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Total | $ | 12,654 | | | $ | 1,878 | | | $ | 14,532 | | | $ | 4,785 | | | $ | 19,317 | |
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| Six Months Ended June 30, 2020 |
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(Amounts in thousands) | FPD | | FCD | | Subtotal–Reportable Segments | | Eliminations and All Other | | Consolidated Total |
Total Realignment and Transformation Charges | | | | | | | | | |
COS | $ | 25,459 | | | $ | 8,970 | | | $ | 34,429 | | | $ | 548 | | | $ | 34,977 | |
SG&A | 10,031 | | | 4,381 | | | 14,412 | | | 26,758 | | | 41,170 | |
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Total | $ | 35,490 | | | $ | 13,351 | | | $ | 48,841 | | | $ | 27,306 | | | $ | 76,147 | |
Consolidated Results
Bookings, Sales and Backlog
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| Three Months Ended June 30, |
(Amounts in millions) | 2021 | | 2020 |
Bookings | $ | 952.8 | | | $ | 808.3 | |
Sales | 898.2 | | | 925.0 | |
| | | Three Months Ended September 30, | | Six Months Ended June 30, |
(Amounts in millions) | 2017 | | 2016 | (Amounts in millions) | 2021 | | 2020 |
Bookings | $ | 892.9 |
| | $ | 959.5 |
| Bookings | $ | 1,896.8 | | | $ | 1,783.6 | |
Sales | 883.4 |
| | 945.9 |
| Sales | 1,755.5 | | | 1,818.5 | |
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| Nine Months Ended September 30, |
(Amounts in millions) | 2017 | | 2016 |
Bookings | $ | 2,820.1 |
| | $ | 2,855.0 |
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Sales | 2,626.8 |
| | 2,919.6 |
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We define a booking as the receipt of a customer order that contractually engages us to perform activities on behalf of our customer with regard to manufacturing, service or support. Bookings recorded and subsequently canceled within the year-to-date period are excluded from year-to-date bookings. Bookings for the three months ended SeptemberJune 30, 2017 decreased2021 increased by $66.6$144.5 million, or 6.9%17.9%, as compared with the same period in 2016.2020. The decreaseincrease included currency benefits of approximately $16$39 million. The decreaseincrease was primarily driven by decreasesincreased customer bookings in the oil and gas, chemical, generalwater and power generation industries. The decreaseincrease in customer bookings was due todriven by both original equipment and aftermarket bookings.
Bookings for the ninesix months ended SeptemberJune 30, 2017 decreased2021 increased by $34.9$113.2 million, or 1.2%6.3%, as compared with the same period in 2016 and2020. The increase included an order for approximately $80 million to provide pumps and related equipment for the Hengli Integrated Refining Complex Project in China. The decrease included negative currency effectsbenefits of approximately $7$65 million. The decreaseincrease was driven by increased customer bookings in the chemical, water, general and oil and gas industries and were partially offset by decreased bookings in the power generation industry. The increase in customer bookings was primarily driven by the general, power generation and chemical industries, partially offset by an increase in the oil and gas industry. The decrease was more heavily weighted towards customer original equipment and to a lesser extent aftermarket bookings.
Sales for the three months ended SeptemberJune 30, 20172021 decreased by $62.5$26.8 million, or 6.6%2.9%, as compared with the same period in 2016.2020. The decrease included currency benefits of approximately $15$39 million. The decrease was due to decreased sales were driven by original equipment, sales with decreased sales into every region except forNorth America, the Middle East.East and Africa, partially offset by increased sales into Asia Pacific, Europe and Latin America. Net sales to international customers, including export sales from the U.S., were approximately 66% and 62%64% of total sales for the three months ended SeptemberJune 30, 20172021 and 2016,2020, respectively.
Sales for the ninesix months ended SeptemberJune 30, 20172021 decreased by $292.8$63.0 million, or 10.0%3.5%, as compared with the same period in 2016.2020. The decrease included negative currency effectsbenefits of approximately $5$66 million. The decrease was primarily due to decreased sales were driven by original equipment, sales with decreased sales into every region.North America, the Middle East and Africa, partially offset by increased sales into Asia Pacific, Europe and Latin America. Net sales to international customers, including export sales from the U.S., were approximately 64%67% and 63% of total sales for the ninethree months ended SeptemberJune 30, 20172021 and 2016.2020, respectively.
BacklogBacklog represents the aggregate value of booked but uncompleted customer orders and is influenced primarily by bookings, sales, cancellationscancellations and currency effects. Backlog of $2,135.2$1,949.5 million at SeptemberJune 30, 20172021 increased by $237.5$94.6 million, or 12.5%5.1%, as compared with December 31, 2016.2020. Currency effects provided an increasea decrease of approximately $106$29 million. Approximately 31%37% and 33% of the backlog at SeptemberJune 30, 20172021 and December 31, 2020, respectively, was related to aftermarket orders. Backlog includes our unsatisfied (or partially unsatisfied) performance obligations related to contracts having an original expected duration in excess of one year of approximately $470 million, as discussed in Note 3 to our condensed consolidated financial statements included in this Quarterly Report.
Gross Profit and Gross Profit Margin
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| Three Months Ended June 30, |
(Amounts in millions, except percentages) | 2021 | | 2020 |
Gross profit | $ | 278.2 | | | $ | 269.7 | |
Gross profit margin | 31.0 | % | | 29.2 | % |
| | | Three Months Ended September 30, | | Six Months Ended June 30, |
(Amounts in millions, except percentages) | 2017 | | 2016 | (Amounts in millions, except percentages) | 2021 | | 2020 |
Gross profit | $ | 267.5 |
| | $ | 278.0 |
| Gross profit | $ | 529.1 | | | $ | 536.2 | |
Gross profit margin | 30.3 | % | | 29.4 | % | Gross profit margin | 30.1 | % | | 29.5 | % |
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| Nine Months Ended September 30, |
(Amounts in millions, except percentages) | 2017 | | 2016 |
Gross profit | $ | 781.0 |
| | $ | 903.8 |
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Gross profit margin | 29.7 | % | | 31.0 | % |
Gross profit for the three months ended SeptemberJune 30, 2017 decreased2021 increased by $10.5$8.5 million, or 3.8%3.2%, as compared with the same period in 2016.2020. Gross profit margin for the three months ended SeptemberJune 30, 20172021 of 30.3%31.0% increased from 29.4%29.2% for the same period in 2016.2020. The increase in gross profit margin was primarily attributeddue to a $6.3$6.6 million charge to write down inventory in Brazil in the third quarter of 2016 that did not recur, lower charges and increased savingsunderutilized capacity manufacturing costs expensed related to our Realignment Programs and a mix shift to higher margin aftermarket sales, partially offset by the negative impact of decreased sales on our absorption of fixed manufacturing costs, increased accrued broad-based annual incentive compensation and lower margin projects that shipped from backlog. Aftermarket sales increased to approximately 50% of total sales, as compared with approximately 44% of total sales for the same period in 2016.
Gross profit for the nine months ended September 30, 2017 decreased by $122.8 million, or 13.6%, as compared with the same period in 2016. Gross profit margin for the nine months ended September 30, 2017 of 29.7% decreased from 31.0% for the same period in 2016. The decrease in gross profit margin was primarily attributed to the negative impact of decreased sales on our absorption of fixed manufacturing costs, lower margin projects that shipped from backlog and a $16.9 million charge for costs incurred related to a contract to supply oil and gas platform equipment to an end user in Latin America, partially offset by $10.9 million of charges to write down inventory in Brazil in 2016COVID-19 pandemic that did not recur, a mix shift to higher margin aftermarket sales and lowerdecreased realignment charges and increased savings related toassociated with our Realignment Programsrealignment actions as compared to the same period in 2016.2020, partially offset by revenue recognized on lower margin original equipment orders. Aftermarket sales increased torepresented approximately 49%52% of total sales, as compared with approximately 44% 50% of total sales for the same period in 2016.2020.
Selling, General and Administrative Expense
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| Three Months Ended September 30, |
(Amounts in millions, except percentages) | 2017 | | 2016 |
SG&A | $ | 206.3 |
| | $ | 281.3 |
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SG&A as a percentage of sales | 23.4 | % | | 29.7 | % |
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| Nine Months Ended September 30, |
(Amounts in millions, except percentages) | 2017 | | 2016 |
SG&A | $ | 681.2 |
| | $ | 747.5 |
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SG&A as a percentage of sales | 25.9 | % | | 25.6 | % |
SG&AGross profit for the threesix months ended SeptemberJune 30, 20172021 decreased by $75.0$7.1 million, or 26.7%1.3%, as compared with the same period in 2016.2020. Gross profit margin for the six months ended June 30, 2021 of 30.1% increased from 29.5% for the same period in 2020. The increase in gross profit margin was primarily due to a $15.0 million charge of underutilized capacity manufacturing costs expensed related to the COVID-19 pandemic in 2020 that did not recur, a mix shift to higher margin aftermarket sales and decreased charges and increased savings related to our realignment actions as compared to the same period in 2020, partially offset by revenue recognized on lower margin original equipment orders. Aftermarket sales represented approximately 52% of total sales, as compared with approximately 50% of total sales for the same period in 2020.
Selling, General and Administrative Expense
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| Three Months Ended June 30, |
(Amounts in millions, except percentages) | 2021 | | 2020 |
SG&A | $ | 210.8 | | | $ | 229.3 | |
SG&A as a percentage of sales | 23.5 | % | | 24.8 | % |
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| Six Months Ended June 30, |
(Amounts in millions, except percentages) | 2021 | | 2020 |
SG&A | $ | 409.1 | | | $ | 474.8 | |
SG&A as a percentage of sales | 23.3 | % | | 26.1 | % |
SG&A for the three months ended June 30, 2021 decreased by $18.5 million, or 8.1%, as compared with the same period in 2020. Currency effects yielded an increase of approximately $3 million.$6 million. SG&A as a percentage of sales for the three months ended SeptemberJune 30, 20172021 decreased 630130 basis points asprimarily due to decreased charges and increased savings related to our realignment actions, partially offset by increased broad-based annual incentive compensation compared with the same period in 2016 due to the $73.5 million reserve established for our primary Venezuelan customer in the third quarter of 2016 that did not recur and increased savings related to our Realignment Programs compared to the same period in 2016, partially offset by increased accrued broad-based annual incentive compensation and lower sales leverage.2020.
SG&A for the ninesix months ended SeptemberJune 30, 20172021 decreased by $66.3$65.7 million, or 8.9%13.8%, as compared with the same period in 2016.2020. Currency effects yielded a decreasean increase of approximately $1$11 million. SGSG&A as a percentage of sales for the ninesix months ended SeptemberJune 30, 20172021 decreased 280 basis points primarily due to decreased charges and increased 30 basis pointssavings related to our realignment actions, decreased travel-related expenses and lower bad debt expense, partially offset by increased broad-based annual incentive compensation as compared with the same period in 2016 due to a $26.0 million impairment charge related to our manufacturing facility in Brazil and lower sales leverage, substantially offset by the $73.5 million reserve established for our primary Venezuelan customer in the third quarter of 2016 that did not recur and increased savings related to our Realignment Programs compared to the same period in 2016.2020.
Net Earnings from Affiliates
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| Three Months Ended June 30, |
(Amounts in millions) | 2021 | | 2020 |
Net earnings from affiliates | $ | 2.9 | | | $ | 3.1 | |
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| Three Months Ended September 30, |
(Amounts in millions) | 2017 | | 2016 |
Net earnings from affiliates | $ | 2.9 |
| | $ | 3.4 |
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| | | Nine Months Ended September 30, | | Six Months Ended June 30, |
(Amounts in millions) | 2017 | | 2016 | (Amounts in millions) | 2021 | | 2020 |
Net earnings from affiliates | $ | 9.0 |
| | $ | 8.5 |
| Net earnings from affiliates | $ | 6.4 | | | $ | 6.3 | |
Net earnings from affiliates for the three months ended SeptemberJune 30, 20172021 decreased $0.5$0.2 million, or 14.7%6.5%, as compared with the same period in 2016.2020.
Net earnings from affiliates for the ninesix months ended SeptemberJune 30, 20172021 increased $0.5$0.1 million, or 5.9%1.6%, as compared with the same period in 2016.2020.
Operating Income and Operating Margin
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| Three Months Ended June 30, |
(Amounts in millions, except percentages) | 2021 | | 2020 |
Operating income | $ | 72.2 | | | $ | 43.5 | |
Operating income as a percentage of sales | 8.0 | % | | 4.7 | % |
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| Six Months Ended June 30, |
(Amounts in millions, except percentages) | 2021 | | 2020 |
Operating income | $ | 128.3 | | | $ | 67.7 | |
Operating income as a percentage of sales | 7.3 | % | | 3.7 | % |
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| Three Months Ended September 30, |
(Amounts in millions, except percentages) | 2017 | | 2016 |
Operating income | $ | 74.0 |
| | $ | 0.1 |
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Operating income as a percentage of sales | 8.4 | % | | — | % |
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| Nine Months Ended September 30, |
(Amounts in millions, except percentages) | 2017 | | 2016 |
Operating income | $ | 250.0 |
| | $ | 164.8 |
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Operating income as a percentage of sales | 9.5 | % | | 5.6 | % |
Operating income for the three months ended SeptemberJune 30, 20172021 increased by $73.9 million as compared with the same period in 2016. The increase included currency benefits of approximately $1 million. The increase was primarily a result of the $75.0 million decrease in SG&A and the $10.9 million pre-tax gain on the sale of the Vogt business, partially offset by the $10.5 million decrease in gross profit.
Operating income for the nine months ended September 30, 2017 increased by $85.2$28.7 million, or 51.7%66.0%, as compared with the same period in 2016.2020. The increase included negative currency effectsbenefits of approximately $6 million. TheThe increase was primarily a result of the $18.5 million decrease in SG&A and by the $8.5 million increase in gross profit.
Operating income for the six months ended June 30, 2021 increased by $60.6 million, or 89.5%, as compared with the same period in 2020. The increase included currency benefits of approximately $7 million. The increase was primarily a $141.2 million pre-tax gain from the saleresult of the Gestra and Vogt businesses and the $66.3$65.7 million decrease in SG&A, partially offset by the $122.8$7 million decrease in gross profit.
Interest Expense and Interest Income
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| Three Months Ended June 30, |
(Amounts in millions) | 2021 | | 2020 |
Interest expense | $ | (14.3) | | | $ | (12.9) | |
Interest income | 0.5 | | | 1.1 | |
| | | Three Months Ended September 30, | | Six Months Ended June 30, |
(Amounts in millions) | 2017 | | 2016 | (Amounts in millions) | 2021 | | 2020 |
Interest expense | $ | (15.0 | ) | | $ | (15.1 | ) | Interest expense | $ | (31.1) | | | $ | (25.9) | |
Interest income | 1.1 |
| | 0.9 |
| Interest income | 1.1 | | | 2.9 | |
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| Nine Months Ended September 30, |
(Amounts in millions) | 2017 | | 2016 |
Interest expense | $ | (44.7 | ) | | $ | (45.0 | ) |
Interest income | 2.4 |
| | 2.2 |
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Interest expense for the three and nine months ended SeptemberJune 30, 2017 decreased $0.12021 increased $1.4 million, and $0.3 million, respectively as compared with the same periodsperiod in 2016. The decreases2020. Interest income for the three and nine month periods were months ended June 30, 2021 decreased $0.7 million, as compared with the same period in 2020. The increase in interest expense was primarily attributable to decreased commitments and borrowings under Revolving Credit Facilityinterest expense associated with the senior notes issued in 2017,the third quarter of 2020. The decrease in interest income was partially due to lower interest rates on our average cash balances compared with same period in 2020.
Interest expense for the six months ended June 30, 2021 increased $5.2 million, as compared towith the same periodsperiod in 2016.2020. Interest income for the six months ended June 30, 2021 decreased $1.8 million, as compared with the same period in 2020. The increase in interest expense was primarily attributable to interest expense associated with the senior notes issued in the third quarter of 2020. The decrease in interest income was partially due to lower interest rates on our average cash balances compared with same period in 2020.
Loss on Extinguishment of Debt
29 | | | | | | | | | | | |
| Six Months Ended June 30, |
(Amounts in millions) | 2021 | | 2020 |
Loss on extinguishment of debt | $ | (7.6) | | | $ | — | |
debt for the six months ended June 30, 2021 of $7.6 million, resulted from the redemption of our 2022 Euro Senior Notes. For a further discussion on the redemption of our 2022 Euro Senior Notes refer to Note 7 to our condensed consolidated financial statements included in this Quarterly Report.
Other Income (Expense), Net
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| Three Months Ended June 30, |
(Amounts in millions) | 2021 | | 2020 |
Other income (expense), net | $ | (7.9) | | | $ | (18.9) | |
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| Six Months Ended June 30, |
(Amounts in millions) | 2021 | | 2020 |
Other income (expense), net | $ | (19.2) | | | $ | 19.3 | |
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| Three Months Ended September 30, |
(Amounts in millions) | 2017 | | 2016 |
Other income, net | $ | 8.3 |
| | $ | 1.9 |
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| Nine Months Ended September 30, |
(Amounts in millions) | 2017 | | 2016 |
Other (expense) income, net | $ | (11.6 | ) | | $ | 1.1 |
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Other income (expense), net for the three months ended SeptemberJune 30, 2017 increased $6.42021 decreased $11.0 million as compared with the same period in 2020, due primarily to a $1.3an $14.6 million increasedecreases in gains arising from transactions on foreign exchange contracts and a $5.8 million increase in gainslosses from transactions in currencies other than our sites' functional currencies.currencies, partially offset by a $0.8 million increase in losses arising from transactions on foreign exchange contracts. The net change was primarily due to the foreign currencycurrency exchange rate movements in the Euro,the Mexican peso, British poundBrazilian real, Canadian dollar and Brazilian realSingapore dollar in relation to the U.S. dollar during the three months ended SeptemberJune 30, 2017,2021, as compared with the same period in 2020.
Other income (expense), net for the six months ended June 30, 2021 decreased $38.5 million as compared with the same period in 2016.
Other expense, net for the nine months ended September 30, 2017 increased $12.7 million from an income of $1.1 million in 2016,2020, due primarily to a $6.8an $37.9 million increase in losses from transactions in currencies other than our sites' functional currencies, andpartially offset by a $5.4$1.9 million increase in lossesgains arising from transactions on foreign exchange contracts. The net change was primarily due to the foreign currency exchange rate movements in the Canadian dollar, Mexican peso, Brazilian real, Euro and British poundBrazilian real in relation to the U.S. dollar during the ninesix months ended SeptemberJune 30, 2017,2021, as comparedcompared with the same period in 2016.2020.
Tax Expense and Tax Rate
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| Three Months Ended June 30, |
(Amounts in millions, except percentages) | 2021 | | 2020 |
Provision for income taxes | $ | 2.7 | | | $ | 4.5 | |
Effective tax rate | 5.4 | % | | 35.2 | % |
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| Three Months Ended September 30, |
(Amounts in millions, except percentages) | 2017 | | 2016 |
Provision for income taxes | $ | 19.6 |
| | $ | 2.8 |
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Effective tax rate | 28.7 | % | | (23.2 | )% |
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| Nine Months Ended September 30, |
(Amounts in millions, except percentages) | 2017 | | 2016 |
Provision for income taxes | $ | 85.8 |
| | $ | 49.5 |
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Effective tax rate | 43.8 | % | | 40.2 | % |
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| Six Months Ended June 30, |
(Amounts in millions, except percentages) | 2021 | | 2020 |
Provision for income taxes | $ | 6.5 | | | $ | 41.5 | |
Effective tax rate | 9.1 | % | | 64.8 | % |
The effective tax rate of 28.7%5.4% for the three months ended SeptemberJune 30, 2017 increased2021 decreased from (23.2)%35.2% for the same period in 2016.2020. The effective tax rate varied from the U.S. federal statutory rate for the three months ended SeptemberJune 30, 20172021 primarily due to the net impact of foreign operations lossesand favorable resolution of audits in certain foreign jurisdictionsjurisdictions. Refer to Note 14 to our condensed consolidated financial statements included in this Quarterly Report for which no tax benefit was provided and taxes related to the sale of the Vogt business.further discussion.
The effective tax rate of 43.8%9.1% for the ninesix months ended SeptemberJune 30, 2017 increased2021 decreased from 40.2%64.8% for the same period in 2016.2020. The effective tax rate varied from the U.S. federal statutory rate for the ninesix months ended SeptemberJune 30, 20172021 primarily due to the net impact of foreign operations, lossesfavorable resolution of audits in certain foreign jurisdictions, for which nothe reversal of certain deferred tax benefit was provided andliabilities as a result of restructuring specific aspects of our global financing arrangements, higher withholding taxes related to the saletransactions with and amongst various foreign subsidiaries and favorable resolution of the Gestra and Vogt businesses.audits in foreign jurisdictions. Refer to Note 14 to our condensed consolidated financial statements included in this Quarterly Report for further discussion.
Other Comprehensive Income (Loss)
| | | | | | | | | | | |
| Three Months Ended June 30, |
(Amounts in millions) | 2021 | | 2020 |
Other comprehensive income (loss) | $ | 16.1 | | | $ | 20.9 | |
| | | Three Months Ended September 30, | | Six Months Ended June 30, |
(Amounts in millions) | 2017 | | 2016 | (Amounts in millions) | 2021 | | 2020 |
Other comprehensive income (loss) | $ | 17.2 |
| | $ | (11.3 | ) | Other comprehensive income (loss) | $ | 9.6 | | | $ | (68.8) | |
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| | | | | | | |
| Nine Months Ended September 30, |
(Amounts in millions) | 2017 | | 2016 |
Other comprehensive income (loss) | $ | 84.8 |
| | $ | (1.2 | ) |
Other comprehensive income for the three months ended SeptemberJune 30, 2017 increased $28.62021 decreased $4.8 million from a lossincome of $11.3$20.9 million in 2016.2020. The increaseddecreased income was primarily due to foreign currency translation adjustments resulting primarily from exchange rate movements of the Euro, Colombian peso, Indian rupee and British pound and Argentine peso versus the U.S. dollar during the three months ended SeptemberJune 30, 2017,2021, as compared with the same period in 2016.2020.
Other comprehensive income for the ninesix months ended SeptemberJune 30, 20172021 increased $85.9 $78.4 million from a loss of $1.2$68.8 million in 2016.2020. The increased increased income was primarily due to foreign currency translation adjustments resultingresulting primarily from
exchange rate movements of the Euro, British poundBrazilian real, Mexican peso and Mexican pesoIndian rupee versus the U.S. dollar during the ninethree months ended SeptemberJune 30, 2017,2021, as compared with the same period in 2016.2020.
Business Segments
We conduct our operations through threetwo business segments based on the type of product and how we manage the business. We evaluate segment performance and allocate resources based on each segment’s operating income. The key operating results for our threetwo business segments, EPD, IPDFPD and FCD, are discussed below.
Engineered Product
Flowserve Pump Division Segment Results
Our largest business segment is EPD,FPD, through which we design, manufacture, distribute and service highly custom and other highly-engineeredengineered pumps, andpre-configured industrial pumps, pump systems, mechanical seals, and auxiliary systems and spare parts (collectively referred to as "original"original equipment"). EPD includes longer lead-time, highly-engineered pump products and shorter cycle engineered pumps and mechanical seals that are generally manufactured more quickly. EPD also manufactures replacement parts and related equipment and provides a full array of replacement parts, repair and support services (collectively referred to as "aftermarket"). EPDservices. FPD primarily operates in the oil and gas, power generation, chemical and general industries. EPDFPD operates in 4748 countries with 3039 manufacturing facilities worldwide, nine13 of which are located in Europe, nine12 in North America, seveneight in Asia and fivesix in Latin America, and it operates 123136 QRCs, including those co-located in manufacturing facilities and/or shared with FCD.
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| Three Months Ended June 30, |
(Amounts in millions, except percentages) | 2021 | | 2020 |
Bookings | $ | 668.8 | | | $ | 536.5 | |
Sales | 617.5 | | | 674.1 | |
Gross profit | 196.4 | | | 197.9 | |
Gross profit margin | 31.8 | % | | 29.4 | % |
SG&A | 133.6 | | | 140.6 | |
Gain on sale of business | 1.8 | | | — | |
Segment operating income | 67.8 | | | 60.4 | |
Segment operating income as a percentage of sales | 11.0 | % | | 9.0 | % |
| | | Three Months Ended September 30, | | Six Months Ended June 30, |
(Amounts in millions, except percentages) | 2017 | | 2016 | (Amounts in millions, except percentages) | 2021 | | 2020 |
Bookings | $ | 432.5 |
| | $ | 497.5 |
| Bookings | $ | 1,322.2 | | | $ | 1,220.1 | |
Sales | 424.2 |
| | 458.5 |
| Sales | 1,220.1 | | | 1,309.7 | |
Gross profit | 136.5 |
| | 140.2 |
| Gross profit | 379.2 | | | 393.7 | |
Gross profit margin | 32.2 | % | | 30.6 | % | Gross profit margin | 31.1 | % | | 30.1 | % |
Segment operating income (loss) | 51.8 |
| | (22.0 | ) | |
Segment operating income (loss) as a percentage of sales | 12.2 | % | | (4.8 | )% | |
SG&A | | SG&A | 266.2 | | | 299.9 | |
Gain on sale of business | | Gain on sale of business | 1.8 | | | — | |
Segment operating income | | Segment operating income | 121.6 | | | 100.1 | |
Segment operating income as a percentage of sales | | Segment operating income as a percentage of sales | 10.0 | % | | 7.6 | % |
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| | | | | | | |
| Nine Months Ended September 30, |
(Amounts in millions, except percentages) | 2017 | | 2016 |
Bookings | $ | 1,357.2 |
| | $ | 1,387.5 |
|
Sales | 1,276.6 |
| | 1,444.2 |
|
Gross profit | 403.8 |
| | 459.5 |
|
Gross profit margin | 31.6 | % | | 31.8 | % |
Segment operating income | 106.9 |
| | 97.4 |
|
Segment operating income as a percentage of sales | 8.4 | % | | 6.7 | % |
Bookings for the three months ended SeptemberJune 30, 20172021 increased by $132.3 million, or 24.7%, as compared with the same period in 2020. The increase included currency benefits of approximately $29 million. The increase in customer bookings was driven by increased orders in the oil and gas, chemical, and water industries and were partially offset by decreased bookings in the general industry. Customer bookings increased $46.6 million into North America, $39.3 million into the Middle East, $22.3 million into Europe, $16.8 million into Latin America and $13.9 million into Africa and were partially offset by decreased bookings of $3.6 million into Asia Pacific. The increase was more heavily weighted towards aftermarket bookings.
Bookings for the six months ended June 30, 2021 increased by $102.1 million, or 8.4%, as compared with the same period in 2020. The increase included currency benefits of approximately $46 million. The increase in customer bookings was driven by increased orders in the chemical, oil and gas and water industries and were partially offset by decreased bookings in the power generation industry. Customer bookings increased $42.6 million into North America, $30.1 million into Latin America, $29.3 million into the Middle East and $22.3 million into Europe and were partially offset by decreased bookings of $51.1 million into Asia Pacific. The increase was more heavily weighted towards aftermarket bookings.
Sales for the three months ended June 30, 2021 decreased by $65.0$56.6 million, or 13.1%8.4% as compared with the same period in 2020 and included currency benefits of approximately $27 million. The decrease was driven by customer original equipment sales. Decreased customer sales of $26.1 million into North America, $17.2 million into the Middle East, $10.0 million into Africa and $9.0 million into Asia Pacific were partially offset by increased sales of $5.3 million into Latin America.
Sales for the six months ended June 30, 2021 decreased by $89.6 million, or 6.8% as compared with the same period in 2020 and included currency benefits of approximately $45 million. The decrease was driven by customer original equipment sales. Decreased customer sales of $69.8 million into North America, $34.3 million into the Middle East and $7.5 million into Africa were partially offset by increased sales of $13.6 million into Europe, $5.2 million into Latin America and $3.3 million into Asia Pacific.
Gross profit for the three months ended June 30, 2021 decreased by $1.5 million, or 0.8%, as compared with the same period in 2016.2020. Gross profit margin for the three months ended June 30, 2021 of 31.8% increased from 29.4% for the same period in 2020. The decrease included currency benefits of approximately $7 million. The decreaseincrease in customer bookingsgross profit margin was primarily driven by the oilattributable to decreased charges and gas, general and chemical industries. Decreased customer bookings of $31.2 million into Europe, $24.8 million into the Middle East, $23.1 million into Latin America and $16.6 million into North America were partially offset by increased customer bookings of $29.9 million into Africa. The decrease was more heavily weighted towards customer original equipment bookings. Interdivision bookings (which are eliminated and are not included in consolidated bookingssavings under our realignment actions as disclosed above) were flat when compared to the same period in 2016.2020, a $3.3 million charge of underutilized capacity manufacturing costs expensed related to the COVID-19 pandemic in 2020 that did not recur and a mix shift to higher margin aftermarket sales.
BookingsGross profit for the ninesix months ended SeptemberJune 30, 20172021 decreased by $30.3$14.5 million, or 2.2%3.7%, as compared with the same period in 2016 and included an order for approximately $80 million to provide pumps and related equipment for the Hengli Integrated Refining Complex Project in China. The decrease included negative currency effects of approximately $4 million. The decrease in customer bookings was primarily driven by the power generation and general industries, partially offset by an increase
in the oil and gas and chemical industries. Decreased customer bookings of $62.0 million into Europe, $61.0 million into the Middle East, $32.5 million into North America and $26.0 million into Latin America, were partially offset by increased customer bookings of $89.3 million into Asia Pacific and $43.7 million into Africa. The decrease was driven by customer aftermarket bookings. Interdivision bookings (which are eliminated and are not included in consolidated bookings as disclosed above) increased $5.0 million.
Sales for the three months ended September 30, 2017 decreased $34.3 million, or 7.5%, as compared with the same period in 2016. The decrease included currency benefits of approximately $5 million. The decrease was driven by customer original equipment sales, resulting from decreased sales of $32.5 million into North America and $4.4 million into Latin America, partially offset by increased sales of $5.2 million into the Middle East. Interdivision sales (which are eliminated and are not included in consolidated sales as disclosed above) increased $1.1 million.
Sales for the nine months ended September 30, 2017 decreased $167.6 million, or 11.6%, as compared with the same period in 2016. The decrease included negative currency effects of approximately $5 million. The decrease was more heavily weighted towards customer original equipment sales, resulting from decreased sales of $108.3 million into North America, $37.5 million into Latin America, $14.8 million into Europe, $14.1 million into the Middle East and $11.5 million into Africa, partially offset by increased sales of $20.1 million into Asia Pacific. Interdivision sales (which are eliminated and are not included in consolidated sales as disclosed above) decreased $1.7 million.
Gross profit for the three months ended September 30, 2017 decreased by $3.7 million, or 2.6%, as compared with the same period in 2016.2020. Gross profit margin for the threesix months ended SeptemberJune 30, 20172021 of 32.2%31.1% increased from 30.6%30.1% for the same period in 2016.2020. The increase in gross profit margin was primarily attributable to decreased charges and increased savings under our realignment actions as compared to the same period in 2020, a $9.2 million charge of underutilized capacity manufacturing costs expensed related to our Realignment Programs,the COVID-19 pandemic in 2020 that did not recur and a mix shift to higher margin aftermarket sales and a $6.3 million charge to write down inventory in Brazil in the third quarter of 2016 that did not recur, partially offset by the negative impact of decreased sales on our absorption of fixed manufacturing costs and lower margin projects that shipped from backlog.sales.
Gross profitSG&A for the ninethree months ended SeptemberJune 30, 20172021 decreased by $55.7$7.0 million, or 12.1%5.0%, as compared with the same period in 2016. Gross profit margin for the nine months ended September 30, 20172020. Currency effects provided an increase of 31.6% approximately $5 million. The decrease in SG&A was primarily due to decreased from 31.8% forcharges and increased savings under our realignment actions as compared to the same period in 2016. The decrease in gross profit margin was primarily attributable to the negative impact of decreased sales on our absorption of fixed manufacturing costs and lower margin projects that shipped from backlog, substantially offset by increased savings related to our Realignment Programs, a mix shift to higher margin aftermarket sales and $10.9 million of charges to write down inventory in Brazil in 2016 that did not recur.2020.
Operating incomeSG&A for the threesix months ended SeptemberJune 30, 2017 increased2021 decreased by $73.8$33.7 million, or 335.5%11.2%, as compared with the same period in 2016. The2020. Currency effects provided an increase included currency benefits of approximately $1approximately $8 million. The increasedecrease in SG&A was primarily due toa $77.9 million decrease in SG&A (including a increase duetravel, administrative and selling-related expenses, lower bad debt expense and decreased charges and increased savings under our realignment actions as compared to currency effects of approximately $1 million), partially offset by the $3.7 million decreasesame period in gross profit. The decrease in SG&A is primarily due to EPD's $71.2 million portion of the $73.5 million reserve established for our primary Venezuelan customer in the third quarter of 2016 that did not recur.2020.
Operating income for the ninethree months ended SeptemberJune 30, 20172021 increased by $9.5$7.4 million, or 9.8%12.3%, as compared with the same period in 2016.2020. The increase included negative currency effectsbenefits of approximately $2$5 million. The increase was primarily due to a $64.5the $7.0 million decrease in SG&A (including a decrease due to currency effects of approximately $1 million), partially offset by the $55.7 $1.5 million decrease in gross profit. The decrease in SG&A is primarily due to EPD's $71.2 million portion of
Operating income for the $73.5 million reserve established for our primary Venezuelan customer in the third quarter of 2016 that did not recur and decreased charges and increased savings related to our Realignment Programs, partially offset by a $26.0 million impairment charge in the second quarter of 2017 related to our manufacturing facility in Brazil.
Backlog of $1,079.7 million at Septembersix months ended June 30, 20172021 increased by $112.9$21.5 million, or 11.7%, as compared with December 31, 2016. Currency effects provided an increase of approximately $54 million. Backlog at September 30, 2017 and December 31, 2016 included $19.7 million and $11.7 million, respectively, of interdivision backlog (which is eliminated and not included in consolidated backlog as disclosed above).
Industrial Product Division Segment Results
Through IPD, we design, manufacture, distribute and service engineered, pre-configured industrial pumps and pump systems, including submersible motors (collectively referred to as "original equipment"). Additionally, IPD manufactures replacement parts and related equipment, and provides a full array of support services (collectively referred to as "aftermarket"). IPD primarily operates in the oil and gas, chemical, power generation and general industries. IPD operates 17 manufacturing facilities, five of which are located in the U.S, eight in Europe and four in Asia and it operates 30 QRCs worldwide, including 19 sites in Europe, six in the U.S., three in Asia and two in Latin America, including those co-located in manufacturing facilities.
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| | | | | | | |
| Three Months Ended September 30, |
(Amounts in millions, except percentages) | 2017 | | 2016 |
Bookings | $ | 196.9 |
| | $ | 189.6 |
|
Sales | 189.7 |
| | 203.3 |
|
Gross profit | 39.3 |
| | 30.5 |
|
Gross profit margin | 20.7 | % | | 15.0 | % |
Segment operating loss | (3.6 | ) | | (17.1 | ) |
Segment operating loss as a percentage of sales | (1.9 | )% | | (8.4 | )% |
|
| | | | | | | |
| Nine Months Ended September 30, |
(Amounts in millions, except percentages) | 2017 | | 2016 |
Bookings | $ | 616.6 |
| | $ | 609.5 |
|
Sales | 559.9 |
| | 615.8 |
|
Gross profit | 98.1 |
| | 128.5 |
|
Gross profit margin | 17.5 | % | | 20.9 | % |
Segment operating loss | (46.0 | ) | | (10.4 | ) |
Segment operating loss as a percentage of sales | (8.2 | )% | | (1.7 | )% |
Bookings for the three months ended September 30, 2017 increased by $7.3 million, or 3.9%21.5%, as compared with the same period in 2016.2020. The increase included currency benefits of approximately $4$6 million. The increase in customer bookings was primarily driven by the oil and gas and water industries, partially offset by a decrease in the general industries. Increased customer bookings of $8.9 million into Africa and $1.4 million into Latin America were partially offset by decreased customer bookings of $3.3 million into the Middle East and $1.1 million into Asia Pacific. The increase was more heavily weighted towards customer original equipment bookings. Interdivision bookings (which are eliminated and are not included in consolidated bookings as disclosed above) increased $1.5 million.
Bookings for the nine months ended September 30, 2017 increased by $7.1 million, or 1.2%, as compared with the same period in 2016 and included negative currency effects of approximately $1 million. Customer bookings increases in the oil and gas and general industries were partially offset by decreases in the chemical and water industries. Increased customer bookings of $13.4 million into Europe, $7.6 million into Africa and $4.6 million into Latin America were partially offset by decreased customer bookings of $21.7 million into the Middle East and $4.9 million into Asia Pacific. The increase was due to customer original equipment bookings. Interdivision bookings (which are eliminated and are not included in consolidated bookings as disclosed above) increased $3.3 million.
Sales for the three months ended September 30, 2017 decreased $13.6 million, or 6.7%, as compared with the same period in 2016. The decrease included currency benefits of approximately $4 million and was driven by decreased customer original equipment sales. The decrease resulted from decreased sales of $13.0 million into Asia Pacific, $8.7 million into North America and $4.3 million into Africa, partially offset by increased sales of $5.9 million into Europe. Interdivision sales (which are eliminated and are not included in consolidated sales as disclosed above) increased $2.3 million when compared to the same period in 2016.
Sales for the nine months ended September 30, 2017 decreased $55.9 million, or 9.1%, as compared with the same period in 2016. The decrease included negative currency effects of approximately $1 million and was driven by decreased customer original equipment sales. The decrease resulted from decreased sales of $30.5 million into North America, $22.0 million into Asia Pacific and $7.3 million into Africa, partially offset by increased sales of $2.6 million into the Middle East. Interdivision sales (which are eliminated and are not included in consolidated sales as disclosed above) increased $1.9 million when compared to the same period in 2016.
Gross profit for the three months ended September 30, 2017 increased by $8.8 million, or 28.9%, as compared with the same period in 2016. Gross profit margin for the three months ended September 30, 2017 of 20.7% increased from 15.0% for the same period in 2016. The increase in gross profit margin was primarily attributable to lower charges and increased savings related to our Realignment Programs, partially offset by the negative impact of decreased sales on our absorption of fixed manufacturing costs.
Gross profit for the nine months ended September 30, 2017 decreased by $30.4 million, or 23.7%, as compared with the same period in 2016. Gross profit margin for the nine months ended September 30, 2017 of 17.5% decreased from 20.9% for the same period in 2016. The decrease in gross profit margin was primarily attributable to a $16.9 million charge in the second quarter of 2017 for costs incurred related to a contract to supply oil and gas platform equipment to an end user in Latin America and the
negative impact of decreased sales on our absorption of fixed manufacturing costs, partially offset by lower charges and increased savings related to our Realignment Programs.
Operating loss for the three months ended September 30, 2017 decreased by $13.5 million, or 78.9%, as compared with the same period in 2016. The decrease included negative currency effects of approximately $1 million. The decreased loss was primarily due to the $8.8 million increase in gross profit and a $4.7$33.7 million decrease in SG&A (including a increase due to currency effects of approximately $1 million). The decrease in SG&A is primarily due to decreased charges and increased savings related to our Realignment Programs.
Operating loss for the nine months ended September 30, 2017 increased by $35.6 million, or 342.3%, as compared with the same period in 2016. The increase included negative currency effects of less than one million. The increased loss was primarily due to the $30.4 million decrease in gross profit and a $4.9 million increase in SG&A (including a decrease due to currency effects of less than one million). The increase in SG&A is primarily due to increased charges related to our Realignment Programs which were partially offset by an increasethe$14.5 milliondecrease in related savings.gross profit.
Backlog of $437.0$1,294.1 million at SeptemberJune 30, 2017 increased2021 increased by $63.5$57.2 million, or 17.0%4.6%, as compared with December 31, 2016.2020. Currency effects provided an increasea decrease of approximately $36$22 million. Backlog at September 30, 2017 and December 31, 2016 included $17.7 million and $14.2 million, respectively, of interdivision backlog (which is eliminated and not included in consolidated backlog as disclosed above).
Flow Control Division Segment Results
Our second largest business segment is FCD which designs, manufactures and distributes a broad portfolio of engineered-to-order and configured-to-order isolation valves, control valves, valve automation products boiler controls and related services.equipment. FCD leverages its experience and application know-how by offering a complete menu of engineered services to complement its expansive product portfolio. FCD has a total of 5046 manufacturing facilities and QRCs in 2522 countries around the world, with five of its 2219 manufacturing operations located in the U.S., nineeight located in Europe, sevenfive located in Asia Pacific and one located in Latin America. Based on independent industry sources, we believe that FCD is the thirdsecond largest industrial valve supplier on a global basis.
| | | Three Months Ended September 30, | | Three Months Ended June 30, |
(Amounts in millions, except percentages) | 2017 | | 2016 | (Amounts in millions, except percentages) | 2021 | | 2020 |
Bookings | $ | 285.9 |
| | $ | 291.9 |
| Bookings | $ | 289.1 | | | $ | 274.6 | |
Sales | 287.7 |
| | 299.3 |
| Sales | 281.2 | | | 252.3 | |
Gross profit | 91.7 |
| | 108.0 |
| Gross profit | 84.8 | | | 76.2 | |
Gross profit margin | 31.9 | % | | 36.1 | % | Gross profit margin | 30.2 | % | | 30.2 | % |
SG&A | | SG&A | 48.0 | | | 50.0 | |
| Segment operating income | 48.5 |
| | 53.7 |
| Segment operating income | 37.2 | | | 26.2 | |
Segment operating income as a percentage of sales | 16.9 | % | | 17.9 | % | Segment operating income as a percentage of sales | 13.2 | % | | 10.4 | % |
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| Six Months Ended June 30, |
(Amounts in millions, except percentages) | 2021 | | 2020 |
Bookings | $ | 582.6 | | | $ | 570.8 | |
Sales | 537.0 | | | 511.7 | |
Gross profit | 159.4 | | | 151.0 | |
Gross profit margin | 29.7 | % | | 29.5 | % |
SG&A | 97.8 | | | 107.6 | |
| | | |
Segment operating income | 61.9 | | | 43.4 | |
Segment operating income as a percentage of sales | 11.5 | % | | 8.5 | % |
|
| | | | | | | |
| Nine Months Ended September 30, |
(Amounts in millions, except percentages) | 2017 | | 2016 |
Bookings | $ | 911.2 |
| | $ | 913.8 |
|
Sales | 843.5 |
| | 915.5 |
|
Gross profit | 277.4 |
| | 315.0 |
|
Gross profit margin | 32.9 | % | | 34.4 | % |
Segment operating income | 254.1 |
| | 140.5 |
|
Segment operating income as a percentage of sales | 30.1 | % | | 15.3 | % |
Bookings for the three months ended SeptemberJune 30, 20172021 increased by $14.5 million, or 5.3%, as compared with the same period in 2020. Bookings included currency benefits of approximately $10 million. The increase in customer bookings was primarily driven by increased orders in the general, power generation and chemical industries, partially offset by decreased bookings in the oil and gas industry. Increase customers bookings of $36.2 million into North America and $12.3 million into Europe were partially offset by $6.0decreased bookings of $26.8 million into Asia Pacific, $5.2 million into the Middle East, $2.4 million into Latin America and $1.4 million into Africa. The increasewas primarily driven by both customer original equipment and aftermarket bookings.
Bookings for the six months ended June 30, 2021 increased by $11.8 million, or 2.1%, as compared with the same period in 2016.2020. Bookings included currency benefits of approximately $5 million. Decreased approximately $19 million. The increase in customer bookings was primarily driven by increased orders in the chemical, and power generation and general industries, partially offset by decreased orders in the the oil and gas industry. Increase customers bookings of $26.2 million into North America and $1.9 million into Asia Pacific were partially offset by increases in the general and oil and gas industries. Decreased customerdecreased bookings of $19.6$12.9 million into Europethe Middle East and $2.4$3.2 million into Latin America were partially offset by increased customer bookings of $15.5 million into North America. The decrease increasewas driven by customer original equipment bookings.
BookingsSales for the ninethree months ended SeptemberJune 30, 2017 decreased by $2.62021 increased $28.9 million, or 0.3%11.5%, as compared with the same period in 2016. Bookings2020. The increase included negative currency effectsbenefits of approximately $2approximately $12 million. DecreasedIncreased sales were driven by both original equipment and aftermarket sales. The increase was primarily driven by increased customer bookings in the general and chemical industries were substantially offset by increases in the power generation and oil and gas industries. Decreased
customer bookings of $58.2$24.5 million into Asia Pacific, $6.7 million into Europe, $3.9 million into the Middle East and $20.9$2.0 million into Latin America, were substantiallypartially offset by increased customer bookings decreased sales of $39.4 million into Asia Pacific, $13.3 million into the Middle East, $11.9$8.6 million into North America and $9.0 million into Africa. The decrease was driven by customer original equipment bookings.America.
Sales for the threesix months ended SeptemberJune 30, 2017 decreased $11.62021 increased $25.3 million, or 3.9%4.9%, as compared with the same period in 2016.2020. The decreaseincrease included currency benefits of approximately $5 million and wasapproximately $21 million. Increased sales were driven by decreased customer both original equipment and aftermarket sales. The decreaseincrease was primarily driven by decreasedincreased customer sales of $7.2$48.0 million into Asia Pacific, $10.1 million into Europe, $6.8$6.4 million into North Americathe Middle East and $4.7$3.3 million into Latin America, partially offset by increased customer salesdecreased sales of $5.1$41.1 million into Asia Pacific and $4.1 million into Africa.North America.
SalesGross profit for the ninethree months ended SeptemberJune 30, 2017 decreased $72.02021 increased by $8.6 million, or 7.9%11.3%, as compared with the same period in 2016.2020. Gross profit margin for the three months ended June 30, 2021 of 30.2% remained consistent with the 30.2% for the same period in 2020. The decrease included currency benefitsincrease in gross profit margin was primarily attributable to a $3.4 million charge of approximately $1 millionunderutilized capacity manufacturing costs expensed related to the COVID-19 pandemic that did not recur and was drivendecreased charges and increased savings under our realignment actions, completely offset by decreased customerrevenue recognized on lower margin original equipment sales. The decrease was primarily driven by decreased customer sales of $26.8 million intoorders as compared to the Middle East, $18.6 million into Europe, $11.2 million into North America and $8.7 million into Asia Pacific, partially offset by increased customer sales of $2.7 million into Africa.same period in 2020.
Gross profit for the threesix months ended SeptemberJune 30, 2017 decreased2021 increased by $16.3$8.4 million, or 15.1%5.6%, as compared with the same period in 2016.2020. Gross profit margin for the threesix months ended SeptemberJune 30, 20172021 of 31.9% decreased29.7% increased from 36.1%29.5% for the same period in 2016.2020. The decreaseincrease in gross profit margin was primarily attributable to increased chargesa $5.8 million charge of underutilized capacity
manufacturing costs expensed related to the COVID-19 pandemic that did not recur and decreased charges and increased savings under our Realignment Programs and the negative impact of decreased sales on our absorption of fixed manufacturing costs, partiallyrealignment actions, substantially offset by increased savings achieved related to our Realignment Programsrevenue recognized on lower margin original equipment orders as compared to the same period in 2016.2020.
Gross profitSG&A for the ninethree months ended SeptemberJune 30, 20172021 decreased by $37.6$2.0 million, or 11.9%4.0%, as compared with the same period in 2020. Currency effects provided an increase of approximately $2 million. The decrease in SG&A was primarily due to decreased charges and increased savings related to our realignment actions, partially offset by increased selling-related expenses as compared to the same period in 2020.
SG&A for the six months ended June 30, 2021 decreased by $10 million, or 9.1%, as compared with the same period in 2020. Currency effects provided an increase of approximately $3 million. The decrease in SG&A was primarily due to decreased charges and increased savings related to our realignment actions, partially offset by increased selling-related expenses as compared to the same period in 2020.
Operating income for the three months ended June 30, 2021 increased by $11.0 million, or 42.0%, as compared with the same period in 2016. Gross profit margin for2020. The increase included currency benefits of approximately $1 million. The increase was primarily due to the nine months ended September 30, 2017 of 32.9% decreased from 34.4% for the same period in 2016. The decrease$8.6 million increase in gross profit margin was primarily attributable toand the negative impact of decreased sales on our absorption of fixed manufacturing costs and lower margin projects shipped from backlog, partially offset by increased savings achieved related to our Realignment Programs compared to the same period$2.0 million decrease in 2016.SG&A.
Operating income for the threesix months ended SeptemberJune 30, 2017 decreased2021 increased by $5.2$19 million, or 9.7%42.6%, as compared with the same period in 2016.2020. The decreaseincrease included currency benefits of approximately $1$2 million. The decrease was due to the $16.3 million decrease in gross profit, partially offset by the $9.9 million pre-tax gain from the sale of the Vogt business and a decrease in SG&A of $1.0 million (including a increase due to currency effects of approximately $1 million). The decrease in SG&A was primarily due to savings achieved related to our Realignment Programs compared to the same period$8.4 million increase in 2016.gross profit and the $9.8 million decrease in SG&A.
Operating income for the nine months ended SeptemberBacklog of $660.4 million at June 30, 20172021 increased by $113.6$37.3 million, or 80.9%, as compared with the same period in 2016. The increase included negative currency effects of approximately $3 million. The increase was primarily attributable to the $141.2 million of pre-tax gain from the sales of the Gestra and Vogt businesses and a decrease in SG&A of $9.4 million (including a decrease due to currency effects of less than one million), partially offset by the $37.6 million decrease in gross profit. The decrease in SG&A was primarily due to savings achieved related to our Realignment Programs compared to the same period in 2016.
Backlog of $659.8 million at September 30, 2017 increased by $75.3 million, or 12.9%6.0%, as compared with December 31, 2016.2020. Currency effects provided an increasea decrease of approximately $16approximately $6 million.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow and Liquidity Analysis
| | | | | | | | | | | |
| Six Months Ended June 30, |
(Amounts in millions) | 2021 | | 2020 |
Net cash flows provided (used) by operating activities | $ | 61.3 | | | $ | 20.2 | |
Net cash flows provided (used) by investing activities | (23.8) | | | (18.3) | |
Net cash flows provided (used) by financing activities | (491.1) | | | (93.7) | |
|
| | | | | | | |
| Nine Months Ended September 30, |
(Amounts in millions) | 2017 | | 2016 |
Net cash flows provided by operating activities | $ | 72.4 |
| | $ | 70.9 |
|
Net cash flows provided (used) by investing activities | 171.1 |
| | (68.9 | ) |
Net cash flows used by financing activities | (136.2 | ) | | (114.3 | ) |
Existing cash, cash generated by operations and borrowings available under our existing RevolvingSenior Credit Facility are our primary sources of short-term liquidity. We monitor the depository institutions that hold our cash and cash equivalents on a regular basis, and we believe that we have placed our deposits with creditworthy financial institutions. Our sources of operating cash generally include the sale of our products and services and the conversion of our working capital, particularly accounts receivable and inventories. Our cash balance at SeptemberJune 30, 20172021 was$502.1 $630.4 million,, as compared with $367.2$1,095.3 million at December 31, 2016.2020.
Our cash balance increaseddecreased by $134.9$464.9 million to $502.1$630.4 million at SeptemberJune 30, 20172021, as compared with December 31, 2016.2020. The cash providedactivity during the first ninesix months of 20172021 included $208.8the $407.5 million redemption of our 2022 Euro Senior Notes, $52.2 million in net cash proceeds from the saledividend payments, $22.5 million in capital expenditures and $17.5 million of our Gestra and Vogt businesses,share repurchases, partially offset by cash used of $74.4 million in dividend payments, $45.0 million of payments on long-term debt and $40.6 million in capital expenditures. See Note 3 to our condensed consolidated financial statements included in this Quarterly Report for more information on the sale of our Gestra and Vogt businesses.provided by operating activities.
For the ninesix months ended SeptemberJune 30, 2017,2021, our cash provided by operating activities was $72.4$61.3 million, as compared with $70.9to $20.2 million for the same period in 2016.2020. Cash flow used byprovided from working capital decreasedincreased for the ninesix months ended SeptemberJune 30, 2017,2021, due primarily to decreased uses of cash related to accruedflows used or increased cash flows provided by contract assets, contract liabilities and income taxes payable, inventory and accounts payable,inventories, partially offset by aincreased cash flows used or decreased source of cash related toflows provided by accounts payable and accounts receivable as compared to the same period in 2016.2020.
Decreases in accounts receivable provided $63.8$14.3 million of cash flow for the ninesix months ended SeptemberJune 30, 2017,2021, as compared with $69.8to $0.9 million for the same period in 2016.2020. As of SeptemberJune 30, 2017,2021, our days’ sales outstanding ("DSO") was 8773 days as compared with 8474 days as of SeptemberJune 30, 2016.2020.
Decreases in prepaid expenses and othercontract assets provided $43.5$12.2 million of cash flow for the ninesix months ended SeptemberJune 30, 2017,2021, as compared with a usecash flows used of $58.7$44.3 million for the same period in 2016, due primarily to a decrease in prepaid income taxes in 2017 compared to an increase in 2016.2020.
Increases in inventory used $20.4$30.8 million and $31.5$36.6 million of cash flow for the ninesix months ended SeptemberJune 30, 20172021 and SeptemberJune 30, 2016,2020, respectively. InventoryInventory turns were 2.6 times3.6 times at both SeptemberJune 30, 2017 and 2016. Our calculation2021, as compared to 3.8 as of inventory turns does not reflect the impact of advanced cash received from our customers. June 30, 2020.
Decreases in accounts payable used $68.0$41.1 million of cash flow for the ninesix months ended SeptemberJune 30, 20172021, as compared with $98.8$9.2 million for the same period in 2016.2020. Decreases in accrued liabilitiesliabilities and income taxestaxes payable used $6.7$37.1 million of cash flow for the ninesix months ended SeptemberJune 30, 20172021, as comparedcompared with $82.3$1.1 million for the same period in 2016.2020.
Cash flowsIncreases in contract liabilities provided by investing activities during$17.0 million of cash flow for the ninesix months ended SeptemberJune 30, 2017 were $171.1 million2021, as compared with a use of $68.9to $4.4 million for the same period in 20162020.
Cash flows used by investing activities during the six months ended June 30, 2021 were $23.8 million, primarily dueas compared to $208.8$18.3 million for the same period in net proceeds from the sale of our Gestra and Vogt businesses.2020. Capital expenditures during the ninesix months ended SeptemberJune 30, 20172021 were $40.6$22.5 million, a decrease of $23.9$6.5 million as compared with the same period in 2016.2020. Our capital expenditures are generally focused on strategic initiatives to pursue new markets, geographic expansion, information technology infrastructure, ongoing scheduled replacements and upgrades and cost reduction opportunities. In 2017, total2021, we currently estimate capital expenditures are expected to be between $70 million and $80 million.million, before consideration of any acquisition activity. In addition, proceeds received during the six months ended June 30, 2021 from disposal of assets provided $2.1 million, primarily from the 2020 sale of non-strategic manufacturing facilities that were included in our Realignment Programs. Proceeds received during the first six months of 2020 included $10.8 million from the disposal of assets, primarily due to the 2019 sale of non-strategic manufacturing facilities that were included in Realignment Programs.
Cash flows used by financing activities during the ninesix months ended SeptemberJune 30, 20172021 were $136.2491.1 million, as compared with $114.3to $93.7 million for the same period in 2016.2020. Cash outflows during the ninesix months ended SeptemberJune 30, 20172021 resulted primarily from a $407.5 million payment on long-term debt resulting from $74.4the redemption of our 2022 Euro Senior Notes, $52.2 million of dividend payments and $45.0the repurchase of $17.5 million of paymentscommon shares.
As of June 30, 2021, we had an available capacity of $738.9 million on long-term debt.
Ourour Senior Credit Facility, matures in October 2020. Approximately 8.3%which provides for a $800.0 million unsecured revolving credit facility with a maturity date of July 16, 2024. Our borrowing capacity is subject to financial covenant limitations based on the terms of our Senior Credit Facility and is also reduced by outstanding Term Loan Facility is due to mature in the remainderletters of 2017 and approximately 33.3% in 2018. As of September 30, 2017, we had available capacity of $708.2 million on our $800.0 million Revolving Credit Facility.credit. Our RevolvingSenior Credit Facility is committed and held by a diversified group of financial institutions. Refer to Note 7 to our condensed consolidated financial statements included in this Quarterly Report for additional information concerning our Senior Credit Facility.
During the ninesix months ended SeptemberJune 30, 2017 and 20162021 we contributed $20 millionmade no cash contributions to our U.S. pension plan. At December 31, 20162020 our U.S. pension plan was fully funded as defined by applicable law. After consideration of our funded status, we do notcurrently anticipate making any additional$20 million in contributions to our U.S. pension plan in 2017,2021, excluding direct benefits paid. We continue to maintain an asset allocation consistent with our strategy to maximize total return, while reducing portfolio risks through asset class diversification.
At September 30, 2017, $489.4 million of our total cash balance of $502.1 million was held by foreign subsidiaries, $375.8 million of which we consider permanently reinvested outside the U.S. Based on the expected near-term liquidity needs of our various geographies and our currently available sources of domestic short-term liquidity, we currently do not anticipate the need to repatriate any permanently reinvested cash to fund domestic operations that would generate adverse tax results. However, in the event this cash is needed to fund domestic operations, we estimate the full $375.8 million could be repatriated resulting in a U.S. cash tax liability between $5.0 million and $15.0 million. Should we be required to repatriate this cash, it could limit our ability to assert permanent reinvestment of foreign earnings and invested capital in future periods.
Considering our current debt structure and cash needs, we currently believe cash flows generated from operating activities combined with availability under our RevolvingSenior Credit Facility and our existing cash balance will be sufficient to meet our cash needs for the next 12 months. Cash flows from operations could be adversely affected by economic, political and other risks associated with sales of our products, operational factors, competition, fluctuations in foreign exchange rates and fluctuations in interest rates, among other factors. See "COVID-19 Liquidity Update" and "Cautionary Note Regarding Forward-Looking Statements" below.
On November 13, 2014, ourJune 30, 2021, we have $101.2 million of remaining capacity for Board of Directors approved a $500.0 million share repurchase authorization, of which as of September 30, 2017, we have $160.7 million of remaining capacity.repurchases. While we currently intend to continue to return cash through dividends and/or share repurchases for the foreseeable future, any future returns of cash through dividends and/or share repurchases will be reviewed individually, declared by our Board of Directors at its discretion and implemented by management at its discretion, depending on our financial condition, business opportunities and market conditions at such time.management.
Financing
Credit Facilities
See Note 10 to our consolidated financial statements included in our 2016 Annual Report and Note 67 to our condensed consolidated financial statements included in this Quarterly Report for a discussion of our Senior Credit Facility and related covenants. We were in compliance with all applicable covenants related tounder our Senior Credit Facility as of June 30, 2021.
COVID-19 Liquidity Update
As of June 30, 2021, we had approximately $1.4 billion of liquidity, consisting of cash and cash equivalents of $630.4 million and $738.9 million of borrowings available under our Senior Credit Facility. In light of the liquidity currently available to us, and the costs savings measures planned and already in place, we expect to be able to maintain adequate liquidity over the next 12 months as we manage through the current market environment. We complied with all covenants through September 30, 2017.will continue to actively monitor the potential impacts of COVID-19 and related events on the credit markets in order to maintain sufficient liquidity and access to capital throughout 2021.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management’s discussion and analysis of financial condition and results of operations are based on our condensed consolidated financial statements and related footnotes contained within this Quarterly Report. Our critical accounting policies used in the preparation of our condensed consolidated financial statements were discussed in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our 20162020 Annual Report. TheseThe critical policies, for which no significant changes have occurred in the ninesix months ended SeptemberJune 30, 2017,2021, include:
•Revenue Recognition;
•Deferred Taxes, Tax Valuation Allowances and Tax Reserves;
•Reserves for Contingent Loss;
•Retirement and Postretirement Benefits; and
•Valuation of Goodwill, Indefinite-Lived Intangible Assets and Other Long-Lived Assets.
The process of preparing condensed consolidated financial statements in conformity with U.S. GAAP requires the use of estimates and assumptions to determine certain of the assets, liabilities, revenues and expenses. These estimates and assumptions are based upon what we believe is the best information available at the time of the estimates or assumptions. The estimates and assumptions could change materially as conditions within and beyond our control change. Accordingly, actual results could differ materially from those estimates. The significant estimates are reviewed quarterly with the Audit Committee of our Board of Directors.
Based on an assessment of our accounting policies and the underlying judgments and uncertainties affecting the application of those policies, we believe that our condensed consolidated financial statements provide a meaningful and fair perspective of our consolidated financial condition and results of operations. This is not to suggest that other general risk factors, such as changes in worldwide demand, changes in material costs, performance of acquired businesses and others, could not adversely impact our consolidated financial condition, results of operations and cash flows in future periods. See "Cautionary Note Regarding Forward-Looking Statements" below.
ACCOUNTING DEVELOPMENTS
We have presented the information about pronouncements not yet implemented in Note 1 to our condensed consolidated financial statements included in this Quarterly Report.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, as amended. Words or phrases such as, "may," "should," "expects," "could," "intends," "plans," "anticipates," "estimates," "believes," "predicts" or other similar expressions are intended to identify forward-looking statements, which include, without limitation, statements concerning our future financial performance, future debt and financing levels, investment objectives, implications of litigation and regulatory investigations and other management plans for future operations and performance.
The forward-looking statements included in this Quarterly Report are based on our current expectations, projections, estimates and assumptions. These statements are only predictions, not guarantees. Such forward-looking statements are subject to numerous risks and uncertainties that are difficult to predict. These risks and uncertainties may cause actual results to differ
materially from what is forecast in such forward-looking statements and are currently, or in the future could be, amplified by the COVID-19 pandemic. Specific factors that might cause such a difference include, without limitation, the following:
•uncertainties related to the impact of the COVID-19 pandemic on our business and operations, financial results and financial position, our customers and suppliers, and on the global economy, including its impact on our sales;
•a portion of our bookings may not lead to completed sales, and our ability to convert bookings into revenues at acceptable profit margins;
•changes in the global financial markets and the availability of capital and the potential for unexpected cancellations or delays of customer orders in our reported backlog;
•our dependence on our customers' ability to make required capital investment and maintenance expenditures;expenditures. The liquidity and financial position of our customers could impact capital investment decisions and their ability to pay in full and/or on a timely basis;
•if we are not able to successfully execute and realize the expected financial benefits from our strategic transformation, realignment and other cost-saving initiatives, our business could be adversely affected;
•risks associated with cost overruns on fixed fee projects and in accepting customer orders for large complex custom engineered products;
•the substantial dependence of our sales on the success of the oil and gas, chemical, power generation and water management industries;
•the adverse impact of volatile raw materials prices on our products and operating margins;
•economic, political and other risks associated with our international operations, including military actions, trade embargoes or changes to tariffs or trade embargoesagreements that could affect customer markets, particularly North African, Russian and Middle Eastern markets and global oil and gas producers, and non-compliance with U.S. export/reexport control, foreign corrupt practice laws, economic sanctions and import laws and regulations;
•increased aging and slower collection of receivables, particularly in Latin America and other emerging markets;
•our exposure to fluctuations in foreign currency exchange rates, particularly the Euro and British pound and in hyperinflationary countries such as Venezuela;Venezuela and Argentina;
•our furnishing of products and services to nuclear power plant facilities and other critical applications;
•potential adverse consequences resulting from litigation to which we are a party, such as litigation involving asbestos-containing material claims;
a foreign government investigation regarding our participation in the United Nations Oil-For-Food Program;
•expectations regarding acquisitions and the integration of acquired businesses;
•our relative geographical profitability and its impact on our utilization of deferred tax assets, including foreign tax credits;
•the potential adverse impact of an impairment in the carrying value of goodwill or other intangible assets;
•our dependence upon third-party suppliers whose failure to perform timely could adversely affect our business operations;
•the highly competitive nature of the markets in which we operate;
•environmental compliance costs and liabilities;
•potential work stoppages and other labor matters;
•access to public and private sources of debt financing;
•our inability to protect our intellectual property in the U.S., as well as in foreign countries;
•obligations under our defined benefit pension plans;
risks and potential liabilities associated with cyber security threats; and
our inability to execute and realize the expected financial benefits of our strategic manufacturing optimization and other cost-saving initiatives.
•our internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud.fraud;
•the recording of increased deferred tax asset valuation allowances in the future or the impact of tax law changes on such deferred tax assets could affect our operating results;
•risks and potential liabilities associated with cyber security threats; and
•ineffective internal controls could impact the accuracy and timely reporting of our business and financial results.
These and other risks and uncertainties are more fully discussed in the risk factors identified in "Item 1A. Risk Factors" in Part I of our 20162020 Annual Report and Part II of this 10-Q,Quarterly Report, and may be identified in our Quarterly Reports on Form 10-Q and our other filings with the SEC and/or press releases from time to time. All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to update any forward-looking statement.
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Item 3. | Quantitative and Qualitative Disclosures about Market Risk. |
Item 3.Quantitative and Qualitative Disclosures About Market Risk.
We have market risk exposure arising from changes in interest rates and foreign currency exchange rate movements in foreign exchange contracts. We are exposed to credit-related losses in the event of non-performance by counterparties to financial instruments, but we currently expect our counterparties will continue to meet their obligations given their current creditworthiness.
InterestLIBOR
On March 5, 2021, the UK Financial Conduct Authority (“FCA”), which regulates the London Interbank Offered Rate Risk
Our earnings are impacted(“LIBOR”) issued an announcement on the future cessation or loss of representativeness of LIBOR benchmark settings currently published by changesICE Benchmark Administration. That announcement confirmed that LIBOR will either cease to be provided by any administrator or will no longer be representative after December 31, 2021 for all non-USD LIBOR reference rates, and for 1-Week and 2-Month USD LIBOR and after June 30, 2023 for other USD LIBOR reference rates. The U.S. Federal Reserve, in conjunction with the Alternative Reference Rate Committee, has proposed the replacement of U.S. dollar LIBOR rates with a new index calculated by short-term interest ratesrepurchase agreements backed by U.S. Treasury securities called the Secured Overnight Financing Rate (“SOFR”). Whether or not SOFR is generally accepted as a resultthe LIBOR replacement remains in question and the future of borrowings under ourLIBOR at this time is uncertain. The Company’s current Senior Credit Facility which bear interest based on floating rates. At September 30, 2017, we had $180.0 millionagreement includes a provision for the determination of variablea successor LIBOR rate debt obligations outstanding under our Senior Credit Facility with a weighted average interest rate of 2.58%. A hypothetical change of 100 basis points inwhen appropriate by reference to the then-prevailing market convention for determining an interest rate for these borrowings, assuming constant variablesyndicated loans in the United States, subject to a right of the lenders thereunder to reject the application of the determined rate debt levels, would have changed interest expense by $1.4 million forwritten notice. While we will work with our administrative agent to incorporate a successor reference rate, there can be no assurances as to what alternative reference rates may be and whether such rates will be more or less favorable than LIBOR and any other unforeseen impacts of the nine months ended September 30, 2017.potential discontinuation of LIBOR.
Foreign Currency Exchange Rate Risk
A substantial portion of our operations are conducted by our subsidiaries outside of the U.S. in currencies other than the U.S. dollar. Almost all of our non-U.S. subsidiaries conduct their business primarily in their local currencies, which are also their functional currencies. Foreign currency exposures arise from translation of foreign-denominated assets and liabilities into
U.S. dollars and from transactions, including firm commitments and anticipated transactions, denominated in a currency other than our or a non-U.S. subsidiary’s functional currency. In March 2015,As a means of managing the volatility of foreign currency exposure with the Euro/U.S. dollar exchange rate, we designated €255.7 million ofentered into three swap agreements associated with our €500.0 million 2022 Euro Senior Notes as a net investment hedge of our investments in certain of our international subsidiaries that usesubsidiaries. The swap agreements are designated as a net investment hedges and as of June 30, 2021, the Euro as their functional currency. Generally,notional value of the swaps agreements was €423.20 million. Routinely, we viewreview our investments in foreign subsidiaries from a long-term perspective and use capital structuring techniques to manage our investment in foreign subsidiaries as deemed necessary. For further discussion related to these swap agreements refer to Note 6 to our condensed consolidated financial statements included in this Quarterly Report. We realizedrecognized net gains (losses) associated with foreign currency translation of $17.7$14.0 million and $(15.6)$19.0 million for the three months Septemberended June 30, 20172021 and 20162020, respectively, and $85.8$3.1 million and $(12.6)$(77.0) million for the ninesix months ended SeptemberJune 30, 20172021 and 2016,2020, respectively, which are included in other comprehensive income (loss).
We employ a foreign currency risk management strategy to minimize potential changes in cash flows from unfavorable foreign currency exchange rate movements. Where available, the use of foreign exchange contracts allows us to mitigate transactional exposure to exchange rate fluctuations as the gains or losses incurred on the foreign 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 beginning in the fourth quarter of 2013 instruments that meet certain criteria are designated for hedge accounting. As of SeptemberJune 30, 2017,2021, we had a U.S. dollar equivalent of $237.6of $385.7 million in aggregate notional amount outstanding in foreign exchange contracts with third parties, as compared with $393.8$388.1 million at December 31, 2016.2020. Transactional currency gains and losses arising from transactions outside of our sites’ functional currencies and changes in fair value of non-designated foreign exchange contracts are included in our consolidated results of operations. We recognized foreign currency net (losses) gains (losses) of $8.4$(4.2) million and $1.4$(18.0) million for the three months ended SeptemberJune 30, 20172021 and 2016,2020, respectively, and $(9.7)$(13.7) million and $2.5$22.4 million for the ninesix months ended SeptemberJune 30, 20172021 and 2016,2020, respectively, which are included in other (expense) income (expense), net in the accompanying condensed consolidated statements of income.
Based on a sensitivity analysis at SeptemberJune 30, 2017,2021, a 10% change in the foreignforeign currency exchange rates for the ninesix months ended SeptemberJune 30, 20172021 would have impacted our net earnings by approximately $11 million. ThisThis calculation assumes that all currencies change in the same direction and proportion relative to the U.S. dollar and that there are no indirect effects, such as changes in non-U.S. dollar sales volumes or prices. This calculation does not take into account the impact of the foreign currency exchange contracts discussed above.
Item 4.Controls and Procedures.
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Item 4. | Controls and Procedures. |
Disclosure Controls and Procedures
Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) are controls and other procedures that are designed to ensure that the information that 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 Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
In connection with the preparation of this Quarterly Report, our management, under the supervision and with the participation of our Principal Executive Officer and Principal Financial Officer, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of SeptemberJune 30, 2017. Our management, including2021. Based on this evaluation, our current Principal Executive Officerprincipal executive officer and Principal Financial Officer,principal financial officer concluded that our disclosure controls and procedures were not effective as of SeptemberJune 30, 2017 because of the previously identified material weaknesses in our internal control over financial reporting described in Item 9A. Controls and Procedures in our Form 10-K/A for the fiscal year ended December 31, 2016.
Management has concluded that, notwithstanding the material weaknesses referred to above, the Company’s unaudited condensed consolidated financial statements in this Form 10-Q fairly state, in all material respects, our financial position, results of operations and cash flows as of the dates, and for the periods presented, in conformity with U.S. GAAP.
Remediation Plan
In the second quarter of 2017, management became actively engaged in the planning for, and implementation of, remediation efforts to address the material weaknesses in our internal control over financial reporting identified above. Management has implemented the following steps in the third quarter of 2017:
enhanced the current business process review control procedures to include additional prior period comparisons and additional key ratios, metrics and risk based criteria as determined by management;
enhanced the detailed site and/or process reviews based on criteria determined by management’s risk assessment including manual journal entries;
conducted enhanced ethics, controls and policy training for employees at the one non-U.S. site where certain employees engaged in conduct that circumvented controls.
Management believes the measures described above and others that may be implemented will remediate the material weaknesses that we have identified. Management is in the process of testing the effectiveness of the revised controls. These material weaknesses cannot be considered fully remediated until the applicable remedial controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.2021.
Changes in Internal Control Over Financial Reporting
Other than the remediation actions identified above, there wereThere have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the quarter ended SeptemberJune 30, 20172021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II — OTHER INFORMATION
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Item 1. | Legal Proceedings. |
Item 1.Legal Proceedings.
We are party to the legal proceedings that are described in Note 1011 to our condensed consolidated financial statements included in "Item 1. Financial Statements" of this Quarterly Report, and such disclosure is incorporated by reference into this "Item 1. Legal Proceedings." In addition to the foregoing, we and our subsidiaries are named defendants in certain other ordinary routine lawsuits incidental to our business and are involved from time to time as parties to governmental proceedings, all arising in the ordinary course of business. Although the outcome of lawsuits or other proceedings involving us and our subsidiaries cannot be predicted with certainty, and the amount of any liability that could arise with respect to such lawsuits or other proceedings cannot be predicted accurately, management does not currently expect the amount of any liability that could arise with respect to these matters, either individually or in the aggregate, to have a material adverse effect on our financial position, results of operations or cash flows.
Item 1A.Risk Factors.
There are numerous factors that affect our business, andfinancial condition, results of operations, cash flows, reputation and/or prospects, many of which are beyond our control. In addition to other information set forth in this Quarterly Report, careful consideration should be given to "Item 1A. Risk Factors" in Part I and "Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations" in Part II of our 20162020 Annual Report, which contain descriptions of significant factors that might cause the actual results of operations in future periods to differ materially from those currently expected or desired.projected in the forward-looking statements contained therein.
There have been no material changes in risk factors discussed in our 20162020 Annual Report and subsequent SEC filings. The risks described in this Quarterly Report filed for the period ended June 30, 2021, our 20162020 Annual Report and in our other SEC filings or press releases from time to time are not the only risks we face. Additional risks and uncertainties are currently deemed immaterial based on management's assessment of currently available information, which remains subject to change; however, new risks that are currently unknown to us may surface in the future that materially adversely affect our business, financial condition, results of operations or cash flows.
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Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.
Note 1213 to our condensed consolidated financial statements included in this Quarterly Report includes a discussion of our share repurchase program and payment of quarterly dividends on our common stock.
During the quarter ended SeptemberJune 30, 20172021, we had no repurchasesrepurchased 311,000 for $12.5 million (representing an average cost of common shares.$40.03 per share). As of SeptemberJune 30, 2017,2021, we have $160.7$101.2 million of remainingremaining capacity under our current share repurchase program. The following table sets forth the activity for each of the three months during the quarter ended SeptemberJune 30, 2017:2021:
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| Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Program (1) | | Maximum Number of Shares (or Approximate Dollar Value) of Shares That May Yet Be Purchased Under the Program (in millions) | |
Period | | | | |
April 1 - 30 | 244,530 | | (2) | $ | 39.78 | | | 244,000 | | | $ | 103.9 | | |
May 1 -31 | 71,835 | | (3) | 41.05 | | | 67,000 | | | 101.2 | | |
June 1 - 30 | 1,353 | | (4) | 42.66 | | | — | | | 101.2 | | |
Total | 317,718 | | | $ | 40.08 | | | 311,000 | | | | |
(1)On November 13, 2014, our Board of Directors approved a $500.0 million share repurchase authorization. Our share repurchase program does not have an expiration date, and we reserve the right to limit or terminate the repurchase program at any time without notice.
(2)Includes 530 shares that were tendered by employees to satisfy minimum tax withholding amounts for Restricted Shares at an average price per share of $40.02.
(3)Includes 3,290 shares that were tendered by employees to satisfy minimum tax withholding amounts for Restricted Shares at an average price per share of $42.93 and 1,545 shares purchased at a price of $41.32 per share by a rabbi trust that we established in connection with our director deferral plans, pursuant to which non-employee directors may elect to defer directors’ quarterly cash compensation to be paid at a later date in the form of common stock.
(4)Represents shares that were tendered by employees to satisfy minimum tax withholding amounts for Restricted Shares.
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| Total Number of Shares Tendered | | Average Price per Share | | Total Number of Shares Purchased as Part of Publicly Announced Program | | Maximum Number of Shares (or Approximate Dollar Value) That May Yet Be Purchased Under the Program (in millions) |
Period | | | |
July 1 - 31 | 320 |
| (1) | $ | 46.17 |
| | — |
| | $ | 160.7 |
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August 1 - 31 | 2,899 |
| (2) | 38.35 |
| | — |
| | 160.7 |
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September 1 - 30 | — |
| | — |
| | — |
| | 160.7 |
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Total | 3,219 |
| | $ | 39.13 |
| | — |
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Item 3.Defaults Upon Senior Securities.
None
Item 4.Mine Safety Disclosures.
Not applicable.
Item 5.Other Information.
None
Item 6.Exhibits
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(1)Exhibit No. | Shares tendered by employees to satisfy minimum tax withholding amounts for Restricted Shares. | Description |
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(2) | Represents 419 shares that were tendered by employees to satisfy minimum tax withholding amounts for Restricted Shares at an average price per share of $38.91, and 2,480 shares purchased at a price of $38.25 per share by a rabbi trust that we established in connection with our director deferral plans, pursuant to which non-employee directors may elect to defer directors’ quarterly cash compensation to be paid at a later date in the form of common stock. |
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Exhibit No. | | Description |
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| | Restated Certificate of Incorporation of Flowserve Corporation, (incorporated by reference to Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013). |
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| | Flowserve Corporation By-Laws, as amended and restated effective May 18, 201720, 2021 (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K datedfiled on May 24, 2017).25, 2021. |
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| | Fourth Amendment to Credit Agreement, dated June 30, 2017, among Flowserve Corporation Bank of America, N.A.,By-Laws, as administrative agent,amended and other lenders referred thereinrestated effective May 20, 2021 (incorporated by reference to Exhibit 10.13.2 to Registrant'sthe Registrant’s Current Report on Form 8-K dated July 7, 2017)filed on May 25, 2021). |
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| | Certification of Principal Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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| | Certification of Principal Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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| | Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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| | Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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101.INS | | Senior Indenture, dated September 11, 2012, by and between Flowserve Corporation and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.1 to the Registrant's Current Report on Form 8-K (File No. 001-13179) dated September 11, 2012). |
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| | First Supplemental Indenture, dated September 11, 2012, by and among Flowserve Corporation, certain of its subsidiaries and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.2 to the Registrant's Current Report on Form 8-K (File No. 001-13179) dated September 11, 2012). |
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| | Second Supplemental Indenture, dated November 1, 2013, by and among Flowserve Corporation, certain of its subsidiaries and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.2 to the Registrant's Current Report on Form 8-K (File No. 001-13179) dated November 1, 2013). |
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| | Third Supplemental Indenture, dated March 17, 2015, by and among Flowserve Corporation, certain of its subsidiaries and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.2 to the Registrant's Current Report on Form 8-K (File No. 001-13179) dated March 17, 2015). |
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| | Fourth Supplemental Indenture, dated September 21, 2020, between Flowserve Corporation and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.2 to the Registrant's Current Report on Form 8-K dated September 22, 2020). |
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101.INS | | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
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101.SCH | | XBRL Taxonomy Extension Schema Document |
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101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document |
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101.LAB | | XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document |
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101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document |
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104 | | The cover page from the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2021, formatted in Inline XBRL (included as Exhibit 101) |
_______________________
* Management contracts and compensatory plans and arrangements required to be filed as exhibits to this Quarterly + Report on Form 10-Q.
+ Filed herewith.
++ Furnished herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | | | | | | |
| | FLOWSERVE CORPORATION | |
| | | |
| | FLOWSERVE CORPORATION | |
| | | |
Date: | November 1, 2017 | /s/ R. Scott Rowe | |
| | R. Scott Rowe | |
| | President and Chief Executive Officer
(Principal Executive Officer)
| |
|
| | | |
Date: | November 1, 2017 | /s/ Lee S. Eckert | |
| | | | | | | | | | | |
Date: | August 5, 2021 | Lee S. Eckert /s/ Amy B. Schwetz | |
| | Amy B. Schwetz | |
| | Senior Vice President and Chief Financial Officer (Principal Financial Officer)
| |
| | | | | | | | | | | |
| | | |
| | | |
Date: | August 5, 2021 | /s/ Scott K. Vopni | |
| | Scott K. Vopni | |
| | Vice President and Chief Accounting Officer (Principal Accounting Officer) | |