FLS 9.30.2013 Financial Statements
 
 
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2013
OR

¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM           to          .
Commission File No. 1-13179
FLOWSERVE CORPORATION
(Exact name of registrant as specified in its charter)

New York
 
31-0267900
(State or other jurisdiction of incorporation or organization)
 
 (I.R.S. Employer Identification No.)
 
 
 
5215 N. O’Connor Blvd., Suite 2300, Irving, Texas
 
75039
(Address of principal executive offices)
 
 
 (Zip Code)

 
(972) 443-6500
 
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). þ Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
Accelerated filer ¨
Non-accelerated filer ¨ (do not check if a smaller reporting company)
Smaller reporting company ¨
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes þ No
As of October 21, 2013, there were 139,468,604 shares of the issuer’s common stock outstanding.


 
 
 



FLOWSERVE CORPORATION
FORM 10-Q
TABLE OF CONTENTS

 
Page
 
No.
 
 
 
 
 
 EX-3.1
 
 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

Item 1.
Financial Statements.
FLOWSERVE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Amounts in thousands, except per share data)
Three Months Ended September 30,
 
2013
 
2012
Sales
$
1,229,057

 
$
1,165,923

Cost of sales
(806,318
)
 
(776,319
)
Gross profit
422,739

 
389,604

Selling, general and administrative expense
(231,569
)
 
(227,797
)
Net earnings from affiliates
2,218

 
3,899

Operating income
193,388

 
165,706

Interest expense
(13,046
)
 
(12,144
)
Interest income
325

 
208

Other income (expense), net
1,733

 
(9,167
)
Earnings before income taxes
182,400

 
144,603

Provision for income taxes
(55,870
)
 
(37,769
)
Net earnings, including noncontrolling interests
126,530

 
106,834

Less: Net earnings attributable to noncontrolling interests
(259
)
 
(538
)
Net earnings attributable to Flowserve Corporation
$
126,271

 
$
106,296

Net earnings per share attributable to Flowserve Corporation common shareholders:
 
 
 
Basic
$
0.90

 
$
0.70

Diluted
0.90

 
0.69

Cash dividends declared per share
$
0.14

 
$
0.12


CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Amounts in thousands)
Three Months Ended September 30,
 
2013
 
2012
Net earnings, including noncontrolling interests
$
126,530

 
$
106,834

Other comprehensive income:
 
 
 
Foreign currency translation adjustments, net of taxes of $(23,353) and $(19,147), respectively
38,581

 
31,641

Pension and other postretirement effects, net of taxes of $(407) and $(463), respectively
(373
)
 
180

Cash flow hedging activity, net of taxes of $(74) and $(130), respectively
152

 
215

Other comprehensive income
38,360

 
32,036

Comprehensive income, including noncontrolling interests
164,890

 
138,870

Comprehensive income attributable to noncontrolling interests
(29
)
 
(700
)
Comprehensive income attributable to Flowserve Corporation
$
164,861

 
$
138,170


See accompanying notes to condensed consolidated financial statements.


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FLOWSERVE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Amounts in thousands, except per share data)
Nine Months Ended September 30,
 
2013
 
2012
Sales
$
3,565,179

 
$
3,423,128

Cost of sales
(2,347,555
)
 
(2,289,739
)
Gross profit
1,217,624

 
1,133,389

Selling, general and administrative expense
(706,278
)
 
(673,578
)
Net earnings from affiliates (Note 2)
36,043

 
13,214

Operating income
547,389

 
473,025

Interest expense
(38,262
)
 
(29,876
)
Interest income
877

 
727

Other expense, net
(8,679
)
 
(22,151
)
Earnings before income taxes
501,325

 
421,725

Provision for income taxes
(154,998
)
 
(112,864
)
Net earnings, including noncontrolling interests
346,327

 
308,861

Less: Net earnings attributable to noncontrolling interests
(1,878
)
 
(2,124
)
Net earnings attributable to Flowserve Corporation
$
344,449

 
$
306,737

Net earnings per share attributable to Flowserve Corporation common shareholders:
 
 
 
Basic
$
2.42

 
$
1.92

Diluted
2.41

 
1.91

Cash dividends declared per share
$
0.42

 
$
0.36


CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Amounts in thousands)
Nine Months Ended September 30,
 
2013
 
2012
Net earnings, including noncontrolling interests
$
346,327

 
$
308,861

Other comprehensive (loss) income:
 
 
 
Foreign currency translation adjustments, net of taxes of $17,254 and $(4,891), respectively
(28,505
)
 
8,082

Pension and other postretirement effects, net of taxes of $(4,634) and $(2,125), respectively
9,254

 
2,726

Cash flow hedging activity, net of taxes of $(399) and $29, respectively
627

 
(89
)
Other comprehensive (loss) income
(18,624
)
 
10,719

Comprehensive income, including noncontrolling interests
327,703

 
319,580

Comprehensive income attributable to noncontrolling interests
(1,722
)
 
(2,173
)
Comprehensive income attributable to Flowserve Corporation
$
325,981

 
$
317,407


See accompanying notes to condensed consolidated financial statements.


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FLOWSERVE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in thousands, except par value)
September 30,
 
December 31,
 
2013
 
2012
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
113,751

 
$
304,252

Accounts receivable, net of allowance for doubtful accounts of $25,916 and $21,491, respectively
1,089,748

 
1,103,724

Inventories, net
1,184,188

 
1,086,663

Deferred taxes
150,760

 
151,093

Prepaid expenses and other
88,204

 
94,484

Total current assets
2,626,651

 
2,740,216

Property, plant and equipment, net of accumulated depreciation of $837,476 and $784,864, respectively
678,934

 
654,179

Goodwill
1,058,802

 
1,053,852

Deferred taxes
26,241

 
26,706

Other intangible assets, net
143,067

 
150,075

Other assets, net
162,499

 
185,930

Total assets
$
4,696,194

 
$
4,810,958

 
 
 
 
LIABILITIES AND EQUITY
Current liabilities:
 
 
 
Accounts payable
$
495,295

 
$
616,900

Accrued liabilities
822,414

 
906,593

Debt due within one year
268,934

 
59,478

Deferred taxes
7,606

 
7,654

Total current liabilities
1,594,249

 
1,590,625

Long-term debt due after one year
839,224

 
869,116

Retirement obligations and other liabilities
452,254

 
456,742

Shareholders’ equity:
 
 
 
Common shares, $1.25 par value
220,991

 
220,991

Shares authorized – 305,000
 
 
 
Shares issued – 176,793 and 176,793, respectively
 
 
 
Capital in excess of par value
464,990

 
467,856

Retained earnings
2,863,863

 
2,579,308

Treasury shares, at cost – 38,357 and 32,389 shares, respectively
(1,511,768
)
 
(1,164,496
)
Deferred compensation obligation
9,359

 
10,870

Accumulated other comprehensive loss
(242,778
)
 
(224,310
)
Total Flowserve Corporation shareholders’ equity
1,804,657

 
1,890,219

Noncontrolling interest
5,810

 
4,256

Total equity
1,810,467

 
1,894,475

Total liabilities and equity
$
4,696,194

 
$
4,810,958


See accompanying notes to condensed consolidated financial statements.

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FLOWSERVE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
Nine Months Ended September 30,
 
2013
 
2012
Cash flows – Operating activities:
 
 
 
Net earnings, including noncontrolling interests
$
346,327

 
$
308,861

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation
66,700

 
66,027

Amortization of intangible and other assets
11,884

 
14,751

Loss on early extinguishment of debt

 
1,293

Net gain on disposition of assets
(248
)
 
(10,461
)
Gain on sale of equity investment in affiliate
(12,995
)
 

Gain on remeasurement of acquired assets
(15,315
)
 

Excess tax benefits from stock-based compensation arrangements
(10,104
)
 
(11,056
)
Stock-based compensation
24,395

 
25,942

Net earnings from affiliates, net of dividends received
(3,397
)
 
(5,798
)
Change in assets and liabilities:
 
 
 
Accounts receivable, net
10,828

 
(45,566
)
Inventories, net
(101,745
)
 
(149,254
)
Prepaid expenses and other
(6,870
)
 
(8,968
)
Other assets, net
(12,574
)
 
(11,609
)
Accounts payable
(126,976
)
 
(75,169
)
Accrued liabilities and income taxes payable
(61,139
)
 
26,057

Retirement obligations and other liabilities
(8,512
)
 
(6,737
)
Net deferred taxes
8,629

 
4,251

Net cash flows provided by operating activities
108,888

 
122,564

Cash flows – Investing activities:
 
 
 
Capital expenditures
(94,702
)
 
(84,180
)
Proceeds from disposal of assets
969

 
11,473

Payments for acquisitions, net of cash acquired
(10,143
)
 
(3,996
)
Proceeds from (contributions to) equity investments in affiliates
46,240

 
(3,825
)
Net cash flows used by investing activities
(57,636
)
 
(80,528
)
Cash flows – Financing activities:
 
 
 
Excess tax benefits from stock-based compensation arrangements
10,104

 
11,056

Payments on long-term debt
(15,000
)
 
(475,000
)
Proceeds from issuance of senior notes

 
498,075

Proceeds from issuance of long-term debt

 
400,000

Proceeds from short-term financing, net
196,000

 

(Payments) borrowings under other financing arrangements, net
(571
)
 
294

Repurchases of common shares
(370,127
)
 
(533,864
)
Payments of dividends
(57,337
)
 
(55,569
)
Payment of deferred loan costs

 
(9,657
)
Other
(78
)
 
(248
)
Net cash flows used by financing activities
(237,009
)
 
(164,913
)
Effect of exchange rate changes on cash
(4,744
)
 
2,941

Net change in cash and cash equivalents
(190,501
)
 
(119,936
)
Cash and cash equivalents at beginning of period
304,252

 
337,356

Cash and cash equivalents at end of period
$
113,751

 
$
217,420


See accompanying notes to condensed consolidated financial statements.

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FLOWSERVE CORPORATION
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1.
Basis of Presentation and Accounting Policies
Basis of Presentation
The accompanying condensed consolidated balance sheet as of September 30, 2013, the related condensed consolidated statements of income and comprehensive income for the three and nine months ended September 30, 2013 and 2012, and the condensed consolidated statements of cash flows for the nine months ended September 30, 2013 and 2012, of Flowserve Corporation are unaudited. In management’s opinion, all adjustments comprising normal recurring adjustments necessary for a fair presentation of such condensed consolidated financial statements have been made.
The accompanying condensed consolidated financial statements and notes in this Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2013 ("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 consolidated financial statements presented in our Annual Report on Form 10-K for the year ended December 31, 2012 ("2012 Annual Report").
On May 23, 2013, our certificate of incorporation was amended to increase the number of authorized shares of common stock from 120.0 million to 305.0 million and enable a three-for-one stock split approved by the Board of Directors on February 7, 2013 in the form of a 200% common stock dividend. The record date for the stock split was June 7, 2013, and additional shares were distributed on June 21, 2013. Shareholders' equity and all share data, including treasury shares and stock-based compensation award shares, and per share data presented herein have been retrospectively adjusted to reflect the impact of the increase in authorized shares and the stock split, as appropriate.
Venezuela – As previously disclosed in our 2012 Annual Report, effective February 13, 2013, the Venezuelan government devalued its currency (bolivar) from 4.3 to 6.3 bolivars to the United States ("U.S.") dollar. Our operations in Venezuela generally consist of a service center that performs service and repair activities. In addition, certain of our operations in other countries sell equipment and parts that are typically denominated in U.S. dollars directly to Venezuelan customers. Our Venezuelan subsidiary's sales for the three and nine months ended September 30, 2013 and total assets at September 30, 2013 represented less than 1% of consolidated sales and total assets for the same periods.
As a result of the devaluation, we recognized a loss of $4.0 million in the first quarter of 2013. The loss was reported in other expense, net in our condensed consolidated statements of income and resulted in no tax benefit. We have evaluated the carrying value of related assets and concluded that there is no current impairment. We are continuing to assess and monitor the ongoing impact of the currency devaluation on our Venezuelan operations and imports into the market, including our Venezuelan subsidiary's ability to remit cash for dividends and other payments at the official rate, as well as further actions of the Venezuelan government and economic conditions that may adversely impact our future consolidated financial condition or results of operations.
Accounting Policies
Significant accounting policies, for which no significant changes have occurred in the nine months ended September 30, 2013, are detailed in Note 1 to our consolidated financial statements included in our 2012 Annual Report.
Accounting Developments
Pronouncements Implemented
In December 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2011-11, "Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities," which requires enhanced disclosures about financial instruments and derivative instruments that are either (1) offset in accordance with either Accounting Standards Codification ("ASC") 210-20-45, "Balance Sheet - Offsetting," or ASC 815-10-45, "Derivatives and Hedging - Overall," or (2) subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in accordance with either ASC 210-20-45 or ASC 815-10-45. The disclosure requirements shall be applied retrospectively for all periods presented. Our adoption of ASU No. 2011-11, effective January 1, 2013, had no impact on our consolidated financial condition and results of operations.
In January 2013, the FASB issued ASU No. 2013-01, "Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities," which limits the scope of ASU 2011-11 to derivatives, repurchase agreements and securities lending transactions to the extent that they are (1) offset in the financial statements or (2) subject to an enforceable master netting arrangement or similar agreement. The disclosure requirements shall be applied retrospectively for all periods presented. Our

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adoption of ASU No. 2013-01, effective January 1, 2013, had no impact on our consolidated financial condition and results of operations.
In July 2012, the FASB issued ASU No. 2012-02, "Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment," which specifies that an entity has the option to first assess qualitative factors to determine whether it is more likely than not that the asset is impaired. Unless an entity determines that it is more likely than not that the fair value of such an asset is less than its carrying amount, it would not need to calculate the fair value of the asset in that year. Our adoption of ASU No. 2012-02, effective January 1, 2013, had no impact on our consolidated financial condition and results of operations.
In February 2013, the FASB issued ASU No. 2013-02, "Comprehensive Income (Topic 220) - Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income," which requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income, but only if the amount reclassified is required under U.S. Generally Accepted Accounting Principles ("GAAP") to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts. Our adoption of ASU No. 2013-02, effective January 1, 2013, had no impact on our consolidated financial condition and results of operations.
In March 2013, the FASB issued ASU No. 2013-05, "Foreign Currency Matters (Topic 830) - Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity," which specifies that a cumulative translation adjustment should be released into earning when an entity ceases to have a controlling financial interest in a subsidiary or group of assets within a consolidated foreign entity and the sale or transfer results in the complete or substantially complete liquidation of the foreign entity. ASU No. 2013-05 is effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2013. We early adopted this ASU effective January 1, 2013 and it did not have a material impact on our consolidated financial condition and results of operations.
In July 2013, the FASB issued ASU No. 2013-10, "Derivatives and Hedging (Topic 815) - Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes," which allows the use of the Fed Funds Effective Swap Rate as a U.S. benchmark interest rate for fair value and cash flow hedges under Topic 815, in addition to interest rates on direct Treasury obligations of the U.S. government and the London Interbank Offered Rate swap rate. This ASU also removes the restriction on using different benchmark rates for similar hedges. ASU No. 2013-10 is effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. Our adoption of ASU No. 2013-10 did not have a material impact on our consolidated financial condition and results of operations.
 Pronouncements Not Yet Implemented
In February 2013, the FASB issued ASU No. 2013-04, "Liabilities (Topic 405) - Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date," which requires a reporting entity that is jointly and severally liable to measure the obligation as the sum of the amount the entity has agreed with co-obligors to pay and any additional amount it expects to pay on behalf of one or more co-obligors. The scope of this ASU excludes obligations addressed by existing guidance. ASU No. 2013-04 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The ASU shall be applied retrospectively for arrangements existing at the beginning of the year of adoption. Our adoption of ASU No. 2013-04 will not have an impact on our consolidated financial condition and results of operations.
In April 2013, the FASB issued ASU No. 2013-07, "Presentation of Financial Statements (Topic 205) - Liquidation Basis of Accounting," which requires an entity to prepare its financial statements using the liquidation basis of accounting when liquidation is imminent. Liquidation is imminent when the likelihood is remote that the entity will return from liquidation and either (a) a plan for liquidation is approved by the person or persons with the authority to make such a plan effective and the likelihood is remote that the execution of the plan will be blocked by other parties or (b) a plan for liquidation is being imposed by other forces (for example, involuntary bankruptcy). ASU No. 2013-07 is effective for entities that determine liquidation is imminent during annual reporting periods beginning after December 15, 2013, and interim reporting periods therein. The ASU shall be applied prospectively from the day that liquidation becomes imminent. Our adoption of ASU No. 2013-07 will not have an impact on our consolidated financial condition and results of operations.
In July 2013, the FASB issued ASU No. 2013-11, "Income Taxes (Topic 740) - Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists," which provides guidance on the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. ASU No. 2013-11 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013.

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The ASU shall be applied prospectively to all unrecognized tax benefits that exist at the effective date. The adoption of ASU No. 2013-11 will not have a material impact on our consolidated financial condition and results of operations.
2.
Exit of Joint Venture
Effective March 28, 2013, we and our joint venture partner agreed to exit our joint venture, Audco India, Limited (“AIL”), which manufactures integrated industrial valves in India. To effect the exit, in two separate transactions, Flow Control Division ("FCD") acquired 100% ownership of AIL's plug valve manufacturing business in an asset purchase for cash of $10.1 million and sold its 50% equity interest in AIL to the joint venture partner for $46.2 million in cash. We remeasured to fair value our previously held equity interest in the purchased net assets of the plug valve manufacturing business resulting in net assets acquired of approximately $25 million and a pre-tax gain of $15.3 million. The sale of our equity interest in AIL resulted in a pre-tax gain of $13.0 million. In the first quarter of 2013, both of the above gains were recorded in net earnings from affiliates in the condensed consolidated statements of income. No pro forma information has been provided due to immateriality. Prior to these transactions, our 50% interest in AIL was recorded using the equity method of accounting.
3.
Stock-Based Compensation Plans
We maintain the Flowserve Corporation Equity and Incentive Compensation Plan (the "2010 Plan"), which is a shareholder-approved plan authorizing the issuance of up to 8,700,000 shares of our common stock in the form of incentive stock options, non-statutory stock options, restricted shares, restricted share units and performance-based units (collectively referred to as "Restricted Shares"), stock appreciation rights and bonus stock. Of the 8,700,000 shares of common stock authorized under the 2010 Plan, 5,668,704 were available for issuance as of September 30, 2013. In addition to the 2010 Plan, we also maintain the Flowserve Corporation 2004 Stock Compensation Plan (the "2004 Plan"). The 2004 Plan authorizes the issuance of up to 10,500,000 shares of common stock through grants of Restricted Shares, stock options and other equity-based awards. Of the 10,500,000 shares of common stock authorized under the 2004 Plan, 827,835 were available for issuance as of September 30, 2013. No stock options have been granted since 2006.
 Restricted Shares – Awards of Restricted Shares are valued at the closing market price of our common stock on the date of grant. The unearned compensation is amortized to compensation expense over the vesting period of the restricted shares. We had unearned compensation of $37.0 million and $30.4 million at September 30, 2013 and December 31, 2012, respectively, which is expected to be recognized over a weighted-average period of approximately one year. These amounts will be recognized into net earnings in prospective periods as the awards vest. The total fair value of Restricted Shares vested during the three months ended September 30, 2013 and 2012 was $0.1 million and $0.1 million, respectively. The total fair value of Restricted Shares vested during the nine months ended September 30, 2013 and 2012 was $34.9 million and $36.4 million, respectively.
We recorded stock-based compensation expense of $5.3 million ($8.1 million pre-tax) and $6.9 million ($10.5 million pre-tax) for the three months ended September 30, 2013 and 2012, respectively. We recorded stock-based compensation expense of $16.1 million ($24.4 million pre-tax) and $17.1 million ($25.9 million pre-tax) for the nine months ended September 30, 2013 and 2012, respectively.
The following table summarizes information regarding Restricted Shares:
 
Nine Months Ended September 30, 2013
 
Shares
 
Weighted Average
Grant-Date Fair
Value
Number of unvested shares:
 
 
 
Outstanding - January 1, 2013
2,376,300

 
$
37.70

Granted
701,913

 
52.33

Vested
(1,018,465
)
 
34.22

Cancelled
(172,420
)
 
42.70

Outstanding - September 30, 2013
1,887,328

 
$
44.56

Unvested Restricted Shares outstanding as of September 30, 2013, includes approximately 900,000 units with performance-based vesting provisions. Performance-based units are issuable in common stock and vest upon the achievement of pre-defined performance targets, primarily based on our average annual return on net assets over a three-year period as compared with the same measure for a defined peer group for the same period. Most units were granted in three annual grants since January 1, 2011 and have a vesting percentage between 0% and 200% depending on the achievement of the specific performance targets. Compensation expense is recognized ratably over a cliff-vesting period of 36 months, based on the fair market value of our common stock on the date of grant, as adjusted for anticipated forfeitures. During the performance period, earned and unearned compensation

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expense is adjusted based on changes in the expected achievement of the performance targets. Vesting provisions range from 0 to approximately 1,800,000 shares based on performance targets. As of September 30, 2013, we estimate vesting of approximately 1,140,000 shares based on expected achievement of performance targets.
4.
Derivative Instruments and Hedges
Our risk management and derivatives policy specifies the conditions under which we may enter into derivative contracts. See Notes 1 and 6 to our consolidated financial statements included in our 2012 Annual Report and Note 7 of this Quarterly Report for additional information on our derivatives. We enter into forward exchange contracts to hedge our cash flow risks associated with transactions denominated in currencies other than the local currency of the operation engaging in the transaction. We have not elected to apply hedge accounting to our forward exchange contracts. At September 30, 2013 and December 31, 2012, we had $666.6 million and $608.9 million, respectively, of notional amount in outstanding forward exchange contracts with third parties. At September 30, 2013, the length of forward exchange contracts currently in place ranged from one day to 20 months. Also as part of our risk management program, we enter into interest rate swap agreements to hedge exposure to floating interest rates on certain portions of our debt. At September 30, 2013 and December 31, 2012, we had $170.0 million and $275.0 million, respectively, of notional amount in outstanding interest rate swaps with third parties. All interest rate swaps are highly effective. At September 30, 2013, the maximum remaining length of any interest rate swap contract in place was approximately 21 months.
We are exposed to risk from credit-related losses resulting from nonperformance by counterparties to our financial instruments. We perform credit evaluations of our counterparties under forward exchange contracts and interest rate swap agreements and expect all counterparties to meet their obligations. If necessary, we would adjust the values of our derivative contracts for our or our counterparties’ credit risks. We have not experienced credit losses from our counterparties.
The fair value of forward exchange contracts not designated as hedging instruments are summarized below:
 
September 30,
 
December 31,
(Amounts in thousands)
2013
 
2012
Current derivative assets
$
5,097

 
$
6,104

Noncurrent derivative assets
424

 
104

Current derivative liabilities
4,822

 
7,814

Noncurrent derivative liabilities
6

 
12

The fair value of interest rate swaps in cash flow hedging relationships are summarized below:
 
September 30,
 
December 31,
(Amounts in thousands)
2013
 
2012
Current derivative liabilities
$
635

 
$
1,417

Noncurrent derivative liabilities
36

 
316

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 forward exchange contracts not designated as hedging instruments are summarized below:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(Amounts in thousands)
2013
 
2012
 
2013
 
2012
Gain (loss) recognized in income
$
3,817

 
$
(855
)
 
$
(3,714
)
 
$
(6,496
)
Gains and losses recognized in our condensed consolidated statements of income for forward exchange contracts are classified as other income (expense), net.
The impact of net changes in the fair values of interest rate swaps in cash flow hedging relationships are summarized in Note 16.

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5.
Debt
Debt, including capital lease obligations, consisted of:
 
September 30,
 
  December 31,  
(Amounts in thousands, except percentages)
2013
 
2012
3.50% Senior Notes due September 15, 2022 (net of unamortized discount)
$
498,247

 
$
498,124

Term Loan Facility, interest rate of 1.50% at September 30, 2013 and 1.81% at December 31, 2012
380,000

 
395,000

Revolving Credit Facility, interest rate of 1.49% at September 30, 2013
196,000

 

Capital lease obligations and other borrowings
33,911

 
35,470

Debt and capital lease obligations
1,108,158

 
928,594

Less amounts due within one year
268,934

 
59,478

Total debt due after one year
$
839,224

 
$
869,116


Senior Notes
On September 11, 2012, we completed a public offering of $500.0 million in aggregate principal amount of senior notes due September 15, 2022 ("Senior Notes"). The Senior Notes bear an interest rate of 3.50% per year, payable on March 15 and September 15 of each year, commencing on March 15, 2013. The Senior Notes were priced at 99.615% of par value, reflecting a discount to the aggregate principal amount.

Senior Credit Facility
On October 4, 2013 we amended our existing credit agreement that provided for a $400.0 million term loan (“Term Loan Facility”) and a revolving credit facility (“Revolving Credit Facility” and, together with the Term Loan Facility, the “Senior Credit Facility”). The significant amendments extend the maturity of our Senior Credit Facility by one year to October 4, 2018, increase the Revolving Credit Facility from $850.0 million to $1.0 billion and remove the $300.0 million sublimit for the issuance of performance letters of credit. The Revolving Credit Facility retains its $30.0 million sublimit for swing line loans and all other significant existing terms under the credit agreement remained unchanged. As of September 30, 2013 we had $196.0 million outstanding under the Revolving Credit Facility. We had outstanding letters of credit of $118.4 million and $152.2 million at September 30, 2013 and December 31, 2012, respectively, which when included with the outstanding Revolving Credit Facility, reduced our borrowing capacity to $535.6 million and $697.8 million, respectively. Under our amended credit agreement and subject to certain conditions, we have the right to increase the amount of the Term Loan Facility or the Revolving Credit Facility by an aggregate amount not to exceed $400.0 million. Our obligations under the Senior Credit Facility are guaranteed by certain of our 100% owned domestic subsidiaries. Such guarantees are released if we achieve certain credit ratings. We had not achieved these ratings as of September 30, 2013. Our compliance with applicable financial covenants under the Senior Credit Facility is tested quarterly, and we complied with all covenants at September 30, 2013.
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 0.175% (per annum) during the period ended September 30, 2013. During the nine months ended September 30, 2013, we made scheduled repayments of $15.0 million under our Term Loan Facility. We have scheduled repayments of $10.0 million due in each of the next four quarters on our Senior Credit Facility. Our Senior Credit Facility bears a floating rate of interest, and we have entered into $170.0 million of notional amount of interest rate swaps at September 30, 2013 to hedge exposure to floating interest rates.

European Letter of Credit Facility
Due to the increased capacity and the removal of the performance letters of credit sublimit of the amended Revolving Credit Facility, we elected not to renew our 364-day unsecured, committed €125.0 million European Letter of Credit Facility ("European LOC Facility") used for contingent obligations in respect of surety and performance bonds, bank guarantees and similar obligations with maturities up to five years. The European LOC Facility will expire in October 2013. The remaining outstanding letters of credit will mature over the next five years. We had outstanding letters of credit drawn on the European LOC Facility of €74.3 million ($100.5 million) and €63.1 million ($83.3 million) as of September 30, 2013 and December 31, 2012, respectively.

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6.
Supplemental Guarantor Financial Information
On September 11, 2012, we completed a public offering of Senior Notes that are fully and unconditionally and jointly and severally guaranteed by certain of our 100% owned domestic subsidiaries. The following condensed consolidating financial statements present the financial position, results of operations and cash flows of Flowserve Corporation (referred to as “Parent” for the purpose of this note only) on a Parent−only (Issuer) basis, the combined guarantor subsidiaries on a guarantor−only basis, the combined non-guarantor subsidiaries on a non-guarantor-only basis and elimination adjustments necessary to arrive at the information for the Parent, guarantor subsidiaries and non-guarantor subsidiaries on a condensed consolidated basis. Investments in subsidiaries have been accounted for using the equity method for this presentation.

FLOWSERVE CORPORATION
CONDENSED CONSOLIDATING STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
 
Three Months Ended September 30, 2013
 
Parent (Issuer)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated Total
(Amounts in thousands)
 
 
 
 
 
 
 
 
 
Sales
$

 
$
483,039

 
$
842,426

 
$
(96,408
)
 
$
1,229,057

Cost of sales

 
(311,255
)
 
(591,471
)
 
96,408

 
(806,318
)
Gross profit

 
171,784

 
250,955

 

 
422,739

Selling, general and administrative expense
(457
)
 
(114,511
)
 
(116,601
)
 

 
(231,569
)
Net earnings from affiliates

 
565

 
1,653

 

 
2,218

Net earnings from consolidated subsidiaries, net of tax
131,425

 
93,959

 

 
(225,384
)
 

Operating income
130,968

 
151,797

 
136,007

 
(225,384
)
 
193,388

Interest expense, net
(7,253
)
 
(3,026
)
 
(2,442
)
 

 
(12,721
)
Other (expense) income, net

 
(1,822
)
 
3,555

 

 
1,733

Earnings before income taxes
123,715

 
146,949

 
137,120

 
(225,384
)
 
182,400

Provision for income taxes
2,556

 
(15,524
)
 
(42,902
)
 

 
(55,870
)
Net earnings, including noncontrolling interests
126,271

 
131,425

 
94,218

 
(225,384
)
 
126,530

Less: Net earnings attributable to noncontrolling interests

 

 
(259
)
 

 
(259
)
Net earnings attributable to Flowserve Corporation
$
126,271

 
$
131,425

 
$
93,959

 
$
(225,384
)
 
$
126,271

Comprehensive income attributable to Flowserve Corporation
$
164,861

 
$
169,865

 
$
129,539

 
$
(299,404
)
 
$
164,861



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Three Months Ended September 30, 2012
 
Parent (Issuer)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated Total
(Amounts in thousands)
 
 
 
 
 
 
 
 
 
Sales
$

 
$
444,206

 
$
807,668

 
$
(85,951
)
 
$
1,165,923

Cost of sales

 
(290,892
)
 
(571,378
)
 
85,951

 
(776,319
)
Gross profit

 
153,314

 
236,290

 

 
389,604

Selling, general and administrative expense
325

 
(95,054
)
 
(133,068
)
 

 
(227,797
)
Net earnings from affiliates

 
1,199

 
2,700

 

 
3,899

Net earnings from consolidated subsidiaries, net of tax
109,165

 
60,848

 

 
(170,013
)
 

Operating income
109,490

 
120,307

 
105,922

 
(170,013
)
 
165,706

Interest expense, net
(4,428
)
 
(4,958
)
 
(2,550
)
 

 
(11,936
)
Other expense, net

 
(1,176
)
 
(7,991
)
 

 
(9,167
)
Earnings before income taxes
105,062

 
114,173

 
95,381

 
(170,013
)
 
144,603

Provision for income taxes
1,234

 
(5,008
)
 
(33,995
)
 

 
(37,769
)
Net earnings, including noncontrolling interests
106,296

 
109,165

 
61,386

 
(170,013
)
 
106,834

Less: Net earnings attributable to noncontrolling interests

 

 
(538
)
 

 
(538
)
Net earnings attributable to Flowserve Corporation
$
106,296

 
$
109,165

 
$
60,848

 
$
(170,013
)
 
$
106,296

Comprehensive income attributable to Flowserve Corporation
$
138,170

 
$
140,824

 
$
90,871

 
$
(231,695
)
 
$
138,170

 
Nine Months Ended September 30, 2013
 
Parent (Issuer)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated Total
(Amounts in thousands)
 
 
 
 
 
 
 
 
 
Sales
$

 
$
1,423,260

 
$
2,415,936

 
$
(274,017
)
 
$
3,565,179

Cost of sales

 
(921,473
)
 
(1,700,099
)
 
274,017

 
(2,347,555
)
Gross profit

 
501,787

 
715,837

 

 
1,217,624

Selling, general and administrative expense
(2,520
)
 
(277,228
)
 
(426,530
)
 

 
(706,278
)
Net earnings from affiliates

 
966

 
35,077

 

 
36,043

Net earnings from consolidated subsidiaries, net of tax
360,756

 
219,391

 

 
(580,147
)
 

Operating income
358,236

 
444,916

 
324,384

 
(580,147
)
 
547,389

Interest expense, net
(20,987
)
 
(8,785
)
 
(7,613
)
 

 
(37,385
)
Other expense, net

 
(5,203
)
 
(3,476
)
 

 
(8,679
)
Earnings before income taxes
337,249

 
430,928

 
313,295

 
(580,147
)
 
501,325

Provision for income taxes
7,200

 
(70,172
)
 
(92,026
)
 

 
(154,998
)
Net earnings, including noncontrolling interests
344,449

 
360,756

 
221,269

 
(580,147
)
 
346,327

Less: Net earnings attributable to noncontrolling interests

 

 
(1,878
)
 

 
(1,878
)
Net earnings attributable to Flowserve Corporation
$
344,449

 
$
360,756

 
$
219,391

 
$
(580,147
)
 
$
344,449

Comprehensive income attributable to Flowserve Corporation
$
325,981

 
$
341,344

 
$
196,768

 
$
(538,112
)
 
$
325,981



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Nine Months Ended September 30, 2012
 
Parent (Issuer)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated Total
(Amounts in thousands)
 
 
 
 
 
 
 
 
 
Sales
$

 
$
1,337,117

 
$
2,343,241

 
$
(257,230
)
 
$
3,423,128

Cost of sales

 
(880,848
)
 
(1,666,121
)
 
257,230

 
(2,289,739
)
Gross profit

 
456,269

 
677,120

 

 
1,133,389

Selling, general and administrative expense
(2,655
)
 
(290,428
)
 
(380,495
)
 

 
(673,578
)
Net earnings from affiliates

 
3,154

 
10,060

 

 
13,214

Net earnings from consolidated subsidiaries, net of tax
312,681

 
195,451

 

 
(508,132
)
 

Operating income
310,026

 
364,446

 
306,685

 
(508,132
)
 
473,025

Interest expense, net
(5,776
)
 
(14,334
)
 
(9,039
)
 

 
(29,149
)
Other income (expense), net

 
673

 
(22,824
)
 

 
(22,151
)
Earnings before income taxes
304,250

 
350,785

 
274,822

 
(508,132
)
 
421,725

Provision for income taxes
2,487

 
(38,104
)
 
(77,247
)
 

 
(112,864
)
Net earnings, including noncontrolling interests
306,737

 
312,681

 
197,575

 
(508,132
)
 
308,861

Less: Net earnings attributable to noncontrolling interests

 

 
(2,124
)
 

 
(2,124
)
Net earnings attributable to Flowserve Corporation
$
306,737

 
$
312,681

 
$
195,451

 
$
(508,132
)
 
$
306,737

Comprehensive income attributable to Flowserve Corporation
$
317,407

 
$
323,427

 
$
202,268

 
$
(525,695
)
 
$
317,407


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FLOWSERVE CORPORATION
CONDENSED CONSOLIDATING BALANCE SHEETS
 
September 30, 2013
 
Parent (Issuer)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated Total
(Amounts in thousands)
 
 
 
 
 
 
 
 
 
ASSETS
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
1,386

 
$

 
$
112,365

 
$

 
$
113,751

Accounts receivable, net

 
238,870

 
850,878

 

 
1,089,748

Intercompany receivables
6,705

 
146,233

 
51,796

 
(204,734
)
 

Inventories, net

 
405,711

 
778,477

 

 
1,184,188

Other current assets, net
1,701

 
123,259

 
114,004

 

 
238,964

Total current assets
9,792

 
914,073

 
1,907,520

 
(204,734
)
 
2,626,651

Property, plant and equipment, net

 
203,338

 
475,596

 

 
678,934

Goodwill

 
671,858

 
386,944

 

 
1,058,802

Intercompany receivables
462,500

 
9,503

 
202,495

 
(674,498
)
 

Investment in consolidated subsidiaries
2,409,231

 
1,736,471

 

 
(4,145,702
)
 

Other assets, net
12,603

 
178,996

 
140,208

 

 
331,807

Total assets
$
2,894,126

 
$
3,714,239

 
$
3,112,763

 
$
(5,024,934
)
 
$
4,696,194

 
 
 
 
 
 
 
 
 
 
LIABILITIES AND EQUITY
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$

 
$
143,513

 
$
351,782

 
$

 
$
495,295

Intercompany payables
69

 
58,432

 
146,233

 
(204,734
)
 

Accrued liabilities
6,999

 
229,263

 
586,152

 

 
822,414

Debt due within one year
236,000

 
10

 
32,924

 

 
268,934

Deferred taxes

 

 
7,606

 

 
7,606

Total current liabilities
243,068

 
431,218

 
1,124,697

 
(204,734
)
 
1,594,249

Long-term debt due after one year
838,247

 

 
977

 

 
839,224

Intercompany payables
1,144

 
663,850

 
9,504

 
(674,498
)
 

Retirement obligations and other liabilities
7,010

 
209,940

 
235,304

 

 
452,254

Total liabilities
1,089,469

 
1,305,008

 
1,370,482

 
(879,232
)
 
2,885,727

Total Flowserve Corporation shareholders’ equity
1,804,657

 
2,409,231

 
1,736,471

 
(4,145,702
)
 
1,804,657

Noncontrolling interest

 

 
5,810

 

 
5,810

Total equity
1,804,657

 
2,409,231

 
1,742,281

 
(4,145,702
)
 
1,810,467

Total liabilities and equity
$
2,894,126

 
$
3,714,239

 
$
3,112,763

 
$
(5,024,934
)
 
$
4,696,194








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December 31, 2012
 
Parent (Issuer)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated Total
(Amounts in thousands)
 
 
 
 
 
 
 
 
 
ASSETS
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
2,609

 
$

 
$
301,643

 
$

 
$
304,252

Accounts receivable, net

 
255,164

 
848,560

 

 
1,103,724

Intercompany receivables

 
157,447

 
42,836

 
(200,283
)
 

Inventories, net

 
382,360

 
704,303

 

 
1,086,663

Other current assets, net
1,967

 
123,152

 
120,458

 

 
245,577

Total current assets
4,576

 
918,123

 
2,017,800

 
(200,283
)
 
2,740,216

Property, plant and equipment, net

 
204,032

 
450,147

 

 
654,179

Goodwill

 
671,858

 
381,994

 

 
1,053,852

Intercompany receivables
462,500

 
10,363

 
85,316

 
(558,179
)
 

Investment in consolidated subsidiaries
2,321,597

 
1,604,462

 

 
(3,926,059
)
 

Other assets, net
14,879

 
175,771

 
172,061

 

 
362,711

Total assets
$
2,803,552

 
$
3,584,609

 
$
3,107,318

 
$
(4,684,521
)
 
$
4,810,958

 
 
 
 
 
 
 
 
 
 
LIABILITIES AND EQUITY
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$

 
$
158,028

 
$
458,872

 
$

 
$
616,900

Intercompany payables
35

 
42,801

 
157,447

 
(200,283
)
 

Accrued liabilities
11,610

 
314,162

 
580,821

 

 
906,593

Debt due within one year
25,000

 
5

 
34,473

 

 
59,478

Deferred taxes

 

 
7,654

 

 
7,654

Total current liabilities
36,645

 
514,996

 
1,239,267

 
(200,283
)
 
1,590,625

Long-term debt due after one year
868,124

 
20

 
972

 

 
869,116

Intercompany payables
1,144

 
546,672

 
10,363

 
(558,179
)
 

Retirement obligations and other liabilities
7,420

 
201,324

 
247,998

 

 
456,742

Total liabilities
913,333

 
1,263,012

 
1,498,600

 
(758,462
)
 
2,916,483

Total Flowserve Corporation shareholders’ equity
1,890,219

 
2,321,597

 
1,604,462

 
(3,926,059
)
 
1,890,219

Noncontrolling interest

 

 
4,256

 

 
4,256

Total equity
1,890,219

 
2,321,597

 
1,608,718

 
(3,926,059
)
 
1,894,475

Total liabilities and equity
$
2,803,552

 
$
3,584,609

 
$
3,107,318

 
$
(4,684,521
)
 
$
4,810,958













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FLOWSERVE CORPORATION
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
 
Nine Months Ended September 30, 2013
 
Parent (Issuer)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated Total
(Amounts in thousands)
 
 
 
 
 
 
 
 
 
Net cash flows provided (used) by operating activities
$
245,150

 
$
138,849

 
$
(26,091
)
 
$
(249,020
)
 
$
108,888

Cash flows — Investing activities:
 
 
 
 
 
 
 
 
 

Capital expenditures

 
(27,827
)
 
(66,875
)
 

 
(94,702
)
Payments for acquisitions, net of cash acquired

 

 
(10,143
)
 

 
(10,143
)
Intercompany loan proceeds

 
911

 
56,333

 
(57,244
)
 

Intercompany loan payments

 
(52
)
 
(173,511
)
 
173,563

 

Proceeds from disposition of assets

 
93

 
876

 

 
969

Affiliate investment activity, net

 

 
46,240

 

 
46,240

Net cash flows used by investing activities

 
(26,875
)
 
(147,080
)
 
116,319

 
(57,636
)
Cash flows — Financing activities:
 
 
 
 
 
 
 
 
 
Excess tax benefits from stock-based payment arrangements

 
8,265

 
1,839

 

 
10,104

Payments on long-term debt
(15,000
)
 

 

 

 
(15,000
)
Short-term financing, net
196,000

 

 

 

 
196,000

Borrowings under other financing arrangements, net

 
(15
)
 
(556
)
 

 
(571
)
Repurchases of common shares
(370,127
)
 

 

 

 
(370,127
)
Payments of dividends
(57,337
)
 

 

 

 
(57,337
)
Intercompany loan proceeds

 
173,511

 
52

 
(173,563
)
 

Intercompany loan payments

 
(56,333
)
 
(911
)
 
57,244

 

Intercompany dividends

 
(237,402
)
 
(11,618
)
 
249,020

 

All other financing, net
91

 

 
(169
)
 

 
(78
)
Net cash flows used by financing activities
(246,373
)
 
(111,974
)
 
(11,363
)
 
132,701

 
(237,009
)
Effect of exchange rate changes on cash

 

 
(4,744
)
 

 
(4,744
)
Net change in cash and cash equivalents
(1,223
)
 

 
(189,278
)
 

 
(190,501
)
Cash and cash equivalents at beginning of period
2,609

 

 
301,643

 

 
304,252

Cash and cash equivalents at end of period
$
1,386

 
$

 
$
112,365

 
$

 
$
113,751



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Nine Months Ended September 30, 2012
 
Parent (Issuer)
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated Total
(Amounts in thousands)
 
 
 
 
 
 
 
 
 
Net cash flows provided by operating activities
$
49,256

 
$
74,283

 
$
50,767

 
$
(51,742
)
 
$
122,564

Cash flows — Investing activities:
 
 
 
 
 
 
 
 
 

Capital expenditures

 
(25,366
)
 
(58,814
)
 

 
(84,180
)
Payments for acquisitions, net of cash acquired

 

 
(3,996
)
 

 
(3,996
)
Intercompany loan proceeds

 
7,869

 

 
(7,869
)
 

Intercompany loan payments

 
(26,648
)
 

 
26,648

 

Intercompany return of capital

 
1,982

 

 
(1,982
)
 

Intercompany capital contribution

 
(483
)
 

 
483

 

Proceeds from disposition of assets

 
87

 
11,386

 

 
11,473

Affiliate investment activity, net

 

 
(3,825
)
 

 
(3,825
)
Net cash flows used by investing activities

 
(42,559
)
 
(55,249
)
 
17,280

 
(80,528
)
Cash flows — Financing activities:
 
 
 
 
 
 
 
 
 
Excess tax benefits from stock-based payment arrangements

 
8,837

 
2,219

 

 
11,056

Payments on long-term debt
(475,000
)
 

 

 

 
(475,000
)
Proceeds from issuance of senior notes
498,075

 

 

 

 
498,075

Proceeds from issuance of long-term debt
400,000

 

 

 

 
400,000

Borrowings under other financing arrangements, net
9

 
171

 
114

 

 
294

Repurchases of common shares
(533,864
)
 

 

 

 
(533,864
)
Payments of dividends
(55,569
)
 

 

 

 
(55,569
)
Payment of deferred loan costs
(9,657
)
 

 

 

 
(9,657
)
Intercompany loan proceeds

 

 
26,648

 
(26,648
)
 

Intercompany loan payments

 

 
(7,869
)
 
7,869

 

Intercompany distributions of capital

 

 
(1,982
)
 
1,982

 

Intercompany capital contribution

 

 
483

 
(483
)
 

Intercompany dividends

 
(40,732
)
 
(11,010
)
 
51,742

 

All other financing, net
250

 

 
(498
)
 

 
(248
)
Net cash flows (used) provided by financing activities
(175,756
)
 
(31,724
)
 
8,105

 
34,462

 
(164,913
)
Effect of exchange rate changes on cash

 

 
2,941

 

 
2,941

Net change in cash and cash equivalents
(126,500
)
 

 
6,564

 

 
(119,936
)
Cash and cash equivalents at beginning of period
150,308

 

 
187,048

 

 
337,356

Cash and cash equivalents at end of period
$
23,808

 
$

 
$
193,612

 
$

 
$
217,420

7.
Fair Value
Our financial instruments are presented at fair value in our condensed consolidated balance sheets, with the exception of our long-term debt. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models may be applied. Assets and liabilities recorded at fair value in our condensed consolidated balance sheets are categorized by hierarchical levels based upon the level of judgment associated with the inputs used to measure their fair values. Recurring fair value measurements are limited to investments in derivative instruments and certain equity securities. The fair value measurements of our derivative instruments are determined using models that maximize the use of the observable market inputs including interest rate curves and both forward and spot prices for currencies, and are classified as Level II under the fair value hierarchy. The fair values of our derivatives are included in Note 4. The fair value measurements of our investments in equity securities are determined

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using quoted market prices and are classified as Level I. The fair values of our investments in equity securities, and changes thereto, are immaterial to our consolidated financial position and results of operations.
The fair value of our debt, excluding the Senior Notes, was estimated using interest rates on similar debt recently issued by companies with credit metrics similar to ours and is classified as Level II under the fair value hierarchy. The carrying value of our debt is included in Note 5 and, except for the Senior Notes, approximates fair value. The estimated fair value of our Senior Notes at September 30, 2013 was $473.1 million compared to the carrying value of $498.2 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 (i.e., cash and cash equivalents, accounts receivable, net and accounts payable) approximated fair value due to their short-term nature at September 30, 2013 and December 31, 2012.
8.
Inventories
Inventories, net consisted of the following:
 
September 30,
 
  December 31,  
(Amounts in thousands)
2013
 
2012
Raw materials
$
379,993

 
$
351,705

Work in process
858,773

 
798,662

Finished goods
314,122

 
288,160

Less: Progress billings
(288,678
)
 
(275,611
)
Less: Excess and obsolete reserve
(80,022
)
 
(76,253
)
Inventories, net
$
1,184,188

 
$
1,086,663


9.
Equity Method Investments