Document

 
 
 






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

FORM 10-Q
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2019
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)

capture.gif
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)
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 every Interactive Data File required to be submitted 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 such files). þ Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
Accelerated filer ¨
Non-accelerated filer ¨ 
Smaller reporting company ¨
Emerging growth company ¨
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ


 
 
 







 
 
 






As of April 24, 2019 there were 131,138,378 shares of the issuer’s common stock outstanding.

FLOWSERVE CORPORATION
FORM 10-Q
TABLE OF CONTENTS

 
Page
 
No.
 
 
 
 
 
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Table of Contents

PART I — FINANCIAL INFORMATION
Item 1.
Financial Statements.
FLOWSERVE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Amounts in thousands, except per share data)
Three Months Ended March 31,
 
2019
 
2018
Sales
$
890,051

 
$
919,954

Cost of sales
(595,975
)
 
(648,521
)
Gross profit
294,076

 
271,433

Selling, general and administrative expense
(205,154
)
 
(229,176
)
Net earnings from affiliates
2,309

 
3,168

Operating income
91,231

 
45,425

Interest expense
(14,031
)
 
(14,879
)
Interest income
2,023

 
1,639

Other income (expense), net
(3,140
)
 
(7,155
)
Earnings before income taxes
76,083

 
25,030

Provision for income taxes
(16,587
)
 
(8,571
)
Net earnings, including noncontrolling interests
59,496

 
16,459

Less: Net earnings attributable to noncontrolling interests
(2,235
)
 
(1,316
)
Net earnings attributable to Flowserve Corporation
$
57,261

 
$
15,143

Net earnings per share attributable to Flowserve Corporation common shareholders:
 
 
 
Basic
$
0.44

 
$
0.12

Diluted
0.44

 
0.12


CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Amounts in thousands)
Three Months Ended March 31,
 
2019
 
2018
Net earnings, including noncontrolling interests
$
59,496

 
$
16,459

Other comprehensive income (loss):
 
 
 
Foreign currency translation adjustments, net of taxes of $2,682 and $(2,290), respectively
6,945

 
19,449

Pension and other postretirement effects, net of taxes of $(207) and $(314), respectively
1,217

 
(310
)
Cash flow hedging activity
62

 
28

Other comprehensive income (loss)
8,224

 
19,167

Comprehensive income, including noncontrolling interests
67,720

 
35,626

Comprehensive income attributable to noncontrolling interests
(2,913
)
 
(2,122
)
Comprehensive income attributable to Flowserve Corporation
$
64,807

 
$
33,504


See accompanying notes to condensed consolidated financial statements.

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Table of Contents

FLOWSERVE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in thousands, except par value)
March 31,
 
December 31,
 
2019
 
2018
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
637,710

 
$
619,683

Accounts receivable, net of allowance for doubtful accounts of $51,525 and $51,501, respectively
781,382

 
792,434

Contract assets, net
224,850

 
228,579

Inventories, net
680,191

 
633,871

Prepaid expenses and other
112,490

 
108,578

Total current assets
2,436,623

 
2,383,145

Property, plant and equipment, net of accumulated depreciation of $968,279 and $956,634, respectively
587,915

 
610,096

Operating lease right-of-use assets, net
198,656

 

Goodwill
1,191,706

 
1,197,640

Deferred taxes
47,745

 
44,682

Other intangible assets, net
186,290

 
190,550

Other assets, net
197,562

 
190,164

Total assets
$
4,846,497

 
$
4,616,277

 
 
 
 
LIABILITIES AND EQUITY
Current liabilities:
 
 
 
Accounts payable
$
398,052

 
$
418,893

Accrued liabilities
405,633

 
391,406

Contract liabilities
207,742

 
202,458

Debt due within one year
72,197

 
68,218

Operating lease liabilities
37,807

 

Total current liabilities
1,121,431

 
1,080,975

Long-term debt due after one year
1,392,238

 
1,414,829

Operating lease liabilities
160,315

 

Retirement obligations and other liabilities
464,527

 
459,693

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
487,673

 
494,551

Retained earnings
3,575,014

 
3,543,007

Treasury shares, at cost – 45,969 and 46,237 shares, respectively
(2,037,586
)
 
(2,049,404
)
Deferred compensation obligation
7,107

 
7,117

Accumulated other comprehensive loss
(566,400
)
 
(573,947
)
Total Flowserve Corporation shareholders’ equity
1,686,799

 
1,642,315

Noncontrolling interests
21,187

 
18,465

Total equity
1,707,986

 
1,660,780

Total liabilities and equity
$
4,846,497

 
$
4,616,277


See accompanying notes to condensed consolidated financial statements.

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Table of Contents

FLOWSERVE CORPORATION
CONDENSED STOCKHOLDERS’ EQUITY STATEMENTS
(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, 2019
176.793

 
$
220,991

 
$
494,551

 
$
3,543,007

 
(46,237
)
 
$
(2,049,404
)
 
$
7,117

 
$
(573,947
)
 
$
18,465

 
$
1,660,780

Stock activity under stock plans

 

 
(14,488
)
 

 
268

 
11,818

 

 

 

 
(2,670
)
Stock-based compensation

 

 
7,610

 

 

 

 

 

 

 
7,610

Net earnings

 

 

 
57,261

 

 

 

 

 
2,235

 
59,496

Cash dividends declared

 

 

 
(25,254
)
 

 

 

 

 

 
(25,254
)
Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 
7,547

 
677

 
8,224

Purchase of shares from and dividends paid to noncontrolling interests

 

 

 

 

 

 

 

 
(190
)
 
(190
)
Other, net

 

 

 

 

 

 
(10
)
 

 

 
(10
)
Balance — March 31, 2019
176.793

 
$
220,991

 
$
487,673

 
$
3,575,014

 
(45,969
)
 
$
(2,037,586
)
 
$
7,107

 
$
(566,400
)
 
$
21,187


$
1,707,986

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance — January 1, 2018
176.793

 
$
220,991

 
$
488,326

 
$
3,503,947

 
(46,471
)
 
$
(2,059,558
)
 
$
6,354

 
$
(505,473
)
 
$
16,367

 
$
1,670,954

ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606)


 

 

 
20,015

 

 

 

 

 

 
20,015

Stock activity under stock plans

 

 
(10,432
)
 

 
198

 
8,538

 

 

 

 
(1,894
)
Stock-based compensation

 

 
3,961

 

 

 

 

 

 

 
3,961

Net earnings

 

 

 
15,143

 

 

 

 

 
1,316

 
16,459

Cash dividends declared

 

 

 
(24,809
)
 

 

 

 

 

 
(24,809
)
Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 
18,362

 
805

 
19,167

Purchase of shares from and dividends paid to noncontrolling interests

 

 

 

 

 

 

 

 
(169
)
 
(169
)
Other, net

 

 

 

 

 

 
(138
)
 

 

 
(138
)
Balance — March 31, 2018
176.793

 
$
220,991

 
$
481,855

 
$
3,514,296

 
(46,273
)
 
$
(2,051,020
)
 
$
6,216

 
$
(487,111
)
 
$
18,319

 
$
1,703,546

See accompanying notes to consolidated financial statements.


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FLOWSERVE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
Three Months Ended March 31,
 
2019
 
2018
Cash flows – Operating activities:
 
 
 
Net earnings, including noncontrolling interests
$
59,496

 
$
16,459

Adjustments to reconcile net earnings to net cash provided (used) by operating activities:
 
 
 
Depreciation
23,361

 
24,693

Amortization of intangible and other assets
4,105

 
4,220

Stock-based compensation
7,609

 
3,962

Foreign currency and other non-cash adjustments
(15,454
)
 
(7,227
)
Change in assets and liabilities:
 
 
 
Accounts receivable, net
8,174

 
41,850

Inventories, net
(49,478
)
 
(48,599
)
Contract assets, net
1,631

 
(64,402
)
Prepaid expenses and other assets, net
(5,128
)
 
203

Accounts payable
(15,399
)
 
(59,645
)
Contract liabilities
5,567

 
(3,870
)
Accrued liabilities and income taxes payable
11,462

 
(32,583
)
Retirement obligations and other
(652
)
 
(2,024
)
       Net deferred taxes
3,225

 
6,236

Net cash flows provided (used) by operating activities
38,519

 
(120,727
)
Cash flows – Investing activities:
 
 
 
Capital expenditures
(10,638
)
 
(13,490
)
Proceeds from disposal of assets and other
39,211

 
600

Net cash flows provided (used) by investing activities
28,573

 
(12,890
)
Cash flows – Financing activities:
 
 
 
Payments on long-term debt
(15,000
)
 
(15,000
)
Proceeds under other financing arrangements
1,660

 
76

Payments under other financing arrangements
(2,484
)
 
(4,198
)
Payments related to tax withholding for stock-based compensation
(2,861
)
 
(2,288
)
Payments of dividends
(24,909
)
 
(24,826
)
Other
(192
)
 
(619
)
Net cash flows provided (used) by financing activities
(43,786
)
 
(46,855
)
Effect of exchange rate changes on cash
(5,279
)
 
12,684

Net change in cash and cash equivalents
18,027

 
(167,788
)
Cash and cash equivalents at beginning of period
619,683

 
703,445

Cash and cash equivalents at end of period
$
637,710

 
$
535,657


See accompanying notes to condensed consolidated financial statements.

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Table of Contents

FLOWSERVE CORPORATION
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1.
Basis of Presentation and Accounting Policies
Basis of Presentation
The accompanying condensed consolidated balance sheet as of March 31, 2019, the related condensed consolidated statements of income and comprehensive income for the three months ended March 31, 2019 and 2018, the condensed consolidated statements of stockholders' equity for the three months ended March 31, 2019 and 2018 and the condensed consolidated statements of cash flows for the three months ended March 31, 2019 and 2018 of Flowserve Corporation are unaudited. In management’s opinion, all adjustments comprising normal recurring adjustments necessary for fair statement of such condensed consolidated financial statements have been made. Where applicable, prior period information has been updated to conform to current year presentation.
The accompanying condensed consolidated financial statements and notes in this Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2019 ("Quarterly Report") are presented as permitted by Regulation S-X and do not contain certain information included in our annual financial statements and notes thereto. Accordingly, the accompanying condensed consolidated financial information should be read in conjunction with the audited consolidated financial statements presented in our Annual Report on Form 10-K for the year ended December 31, 2018 ("2018 Annual Report").
Resegmentation - We have determined that there are meaningful operational synergies and benefits to combining our previously reported Engineered Product Division ("EPD") and Industrial Product Division ("IPD") segments into one reportable segment, Flowserve Pump Division ("FPD"). During the quarter ended March 31, 2019 the reorganization was implemented and as a result we report our financial information reflecting two operating segment structure, FPD and Flow Control Division ("FCD"). The reorganization of the segments reflects how our chief operating decision maker (Chief Executive Officer) regularly reviews financial information to allocate resources and assess performance.
Accounting Developments
Pronouncements Implemented
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No.2016-02, “Leases (Topic 842),” ("New Lease Standard"). The New Lease Standard increases transparency and comparability by requiring lessees to recognize right-of-use (“ROU”) assets and lease liabilities for operating leases on their consolidated balance sheets. Additionally, expanded disclosures are required to enable users of financial statements to understand the amount, timing and uncertainty of cash flows arising from leases.
We adopted the New Lease Standard effective January 1, 2019, utilizing the modified retrospective approach and have elected an initial application date of January 1, 2019. The adoption resulted in an increase to total assets and liabilities due to the recording of lease ROU assets and lease liabilities of approximately $210 million as of January 1, 2019. The adoption did not materially impact our condensed consolidated results of operations or cash flows. Refer to Note 4 for further discussion of our adoption of the New Lease Standard.
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. Our adoption of ASU No. 2017-11 effective January 1, 2019 did not have an impact on our condensed 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 amendments in this ASU must be applied to annual reporting periods beginning after December 15, 2019. Early adoption is permitted. Our adoption of ASU No. 2017-12 effective January 1, 2019 did not have an impact on our condensed consolidated financial condition and results of operations.
In February 2018, the FASB issued ASU No. 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Comprehensive Income (“AOCI”)." The ASU and its amendments

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were issued as a result of the enactment of the U.S. Tax Cuts and Jobs Act of 2017. The amendments of this ASU address the available options to reclassify stranded tax effects within AOCI to retained earnings in each period in which the effect of the change (or portion thereof) is recorded. Additionally, the ASU outlines the disclosure requirements for releasing income tax effects from AOCI. The ASU is effective for fiscal years beginning after December 15, 2018. The ASU should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. We elected not to reclassify the income tax effects of the Tax Cuts and Jobs Act from accumulated comprehensive income to retained earnings.
In July 2018, the FASB issued ASU No. 2018-07, "Compensation - Stock Compensation (Topic 718) - Improvements to Non-employee Share-based Payment Accounting." The amendments of this ASU apply to all share-based payment transactions to non-employees, in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations, accounted under ASC 505-50, Equity-Based Payments to Non-Employees. Under the amendments of ASU 2018-07, most of the guidance on compensation to non-employees would be aligned with the requirements for shared based payments granted to employees, Topic 718. The ASU is effective for fiscal years beginning after December 15, 2018 . Early adoption is permitted. Our adoption of ASU No. 2018-07-12 effective January 1, 2019 did not have an impact on our condensed consolidated financial condition and results of operations.
Pronouncements Not Yet Implemented
In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments." The ASU requires, among other things, the use of a new current expected credit loss ("CECL") model in order to determine our allowances for doubtful accounts with respect to accounts receivable and contract assets. The CECL model requires that we estimate our lifetime expected credit loss with respect to our receivables and contract assets and record allowances that, when deducted from the balance of the receivables, represent the net amounts expected to be collected. We will also be required to disclose information about how we developed the allowances, including changes in the factors that influenced our estimate of expected credit losses and the reasons for those changes. The amendments of the ASU are effective for fiscal years beginning after December 15, 2019. We are currently evaluating the impact of ASU No. 2016-13 on our consolidated financial condition and results of operations.
In January 2017, the FASB issued ASU No. 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment." The amendments in this ASU allow companies to apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit’s carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The amendments of the ASU are effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We are currently evaluating the impact of ASU No. 2017-04 on our consolidated financial condition and results of operations.
In August 2018, the FASB issued ASU No. 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement." The amendments of the ASU modify the disclosure requirements for fair value measurements by removing, modifying, or adding certain disclosure information requirements for assets and liabilities measured at fair value in the statement of financial position or disclosed in the notes to financial statements. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted for the removed disclosures and delayed adoption until fiscal year 2020 permitted for the new disclosures. The removed and modified disclosures will be adopted on a retrospective basis and the new disclosures will be adopted on a prospective basis. We are currently evaluating the impact of ASU No. 2018-13 on our consolidated financial condition and results of operations.
In August 2018, the FASB issued ASU No. 2018-14, "Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20): Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans." The ASU amends the disclosure requirements by adding, clarifying, or removing certain disclosures for sponsor defined benefit pension or other postretirement plans. The amendments are effective for fiscal years ending after December 15, 2020 and the amendments should be applied retrospectively to all periods presented. We are currently evaluating the impact of ASU No. 2018-14 on our consolidated financial condition and results of operations.
In August 2018, the FASB issued ASU No. 2018-15, "Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract." The ASU addresses how entities should account for costs associated with implementing a cloud computing arrangement that is considered a service contract. Per the amendments of the ASU, implementation costs incurred in a cloud computing arrangement that is a service contract should be accounted for in the same manner as implementation costs incurred to develop or obtain software for internal use as prescribed by guidance in ASC 350-40. The ASU requires that implementation costs incurred in a cloud computing arrangement be capitalized rather than expensed. Further, the ASU specifies the method for the amortization of costs incurred during implementation, and the manner in which the unamortized portion of these capitalized implementation costs should be evaluated for impairment. The ASU also provides guidance on how to present such implementation costs in the financial

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statements and also creates additional disclosure requirements. The amendments are effective for fiscal years beginning after December 15, 2019. Early adoption of the ASU requirements is permitted, including adoption in any interim period. The amendments in this ASU should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. We are currently evaluating the impact of ASU No. 2018-15 on our consolidated financial condition and results of operations.
In October 2018, the FASB issued ASU No. 2018-17, "Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities ("VIEs")." The standard reduces the cost and complexity of financial reporting associated with VIEs. The new standard amends the guidance for determining whether a decision-making fee is a VIE.  The amendments require organizations to consider indirect interests held through related parties under common control on a proportional basis rather than as the equivalent of a direct interest in its entirety as currently required in GAAP. The amendments of this ASU are effective for fiscal years beginning after December 15, 2019. We are currently evaluating the impact of ASU No. 2018-17 on our consolidated financial condition and results of operations.
In November 2018, the FASB issued ASU No. 2018-18, "Collaborative Arrangements (Topic 808): Clarifying the Interaction Between Topic 808 and Topic 606." The ASU clarifies the interaction between the guidance for certain collaborative arrangements and the New Revenue Standard. The amendments of the ASU provide guidance on how to assess whether certain transactions between collaborative arrangement participants should be accounted for within the New Revenue Standard. The ASU also provides more comparability in the presentation of revenue for certain transactions between collaborative arrangement participants. Parts of the collaborative arrangement that are not in the purview of the revenue recognition standard should be presented separately. The amendments are effective for fiscal years beginning after December 15, 2019. Early adoption is permitted. We are currently evaluating the impact of ASU No. 2018-18 on our consolidated financial condition and results of operations.
2.
Revenue Recognition
We enter into contracts with customers typically having 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 perform.
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 17% and 23% of total revenue for the three month periods ended March 31, 2019 and 2018, 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 83% and 77% of total revenue for the three month periods ended March 31, 2019 and 2018, respectively. Refer to Note 2 to our consolidated financial statements included in our 2018 Annual Report for a more comprehensive discussion of our policies and accounting practices of revenue recognition.
Disaggregated Revenue
We conduct our operations through two business segments based on the type of product and how we manage the business:
FPD for custom, highly-engineered pumps, pre-configured industrial pumps, pump systems, mechanical seals, auxiliary systems and replacement parts and related services; and
Flow Control Division ("FCD") for engineered and industrial valves, control valves, actuators and controls and related services.
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 two business segments generate Original Equipment and Aftermarket revenues.

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The following table presents our customer revenues disaggregated by revenue source:
 
Three Months Ended March 31, 2019
(Amounts in thousands)
FPD
 
FCD
 
Total
Original Equipment
$
205,803

 
$
214,047

 
$
419,850

Aftermarket
402,956

 
67,245

 
470,201

 
$
608,759

 
$
281,292

 
$
890,051

 
 
 
 
 
 
 
Three Months Ended March 31, 2018
(Amounts in thousands)
FPD
 
FCD
 
Total
Original Equipment
$
254,083

 
$
210,534

 
$
464,617

Aftermarket
389,957

 
65,380

 
455,337

 
$
644,040

 
$
275,914

 
$
919,954

 
Our customer sales are diversified geographically. The following table presents our revenues disaggregated by geography, based on the shipping addresses of our customers:
 
Three Months Ended March 31, 2019
(Amounts in thousands)
FPD
 
FCD
 
Total
North America(1)
$
247,769

 
$
135,177

 
$
382,946

Latin America(1)
37,601

 
5,796

 
43,397

Middle East and Africa
74,366

 
22,891

 
97,257

Asia Pacific
113,948

 
57,192

 
171,140

Europe
135,075

 
60,236

 
195,311

 
$
608,759

 
$
281,292

 
$
890,051

 
 
 
 
 
 
 
Three Months Ended March 31, 2018
(Amounts in thousands)
FPD
 
FCD
 
Total
North America(1)
$
258,875

 
$
124,408

 
$
383,283

Latin America(1)
41,467

 
5,669

 
47,136

Middle East and Africa
86,044

 
33,049

 
119,093

Asia Pacific
128,120

 
56,222

 
184,342

Europe
129,534

 
56,566

 
186,100

 
$
644,040

 
$
275,914

 
$
919,954

 
_____________________________________
(1) North America represents United States and Canada; Latin America includes Mexico.

On March 31, 2019, the aggregate transaction price allocated to unsatisfied (or partially unsatisfied) performance obligations was approximately $516 million. We estimate recognition of approximately $366 million of this amount as revenue in the remainder of 2019 and an additional $150 million in 2020 and thereafter.
Revenue recognized for performance obligations satisfied (or partially satisfied) in prior periods for the three months ended March 31, 2019 and 2018 was not material.

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.

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The following table presents opening and closing balances of contract assets and contract liabilities, current and long-term, for the three months ended March 31, 2019:
( 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, 2019
$
228,579

 
10,967

 
$
202,458

 
$
1,370

Revenue recognized that was included in contract liabilities at the beginning of the period

 

 
(73,417
)
 

Increase due to revenue recognized in the period in excess of billings
155,444

 

 

 

Increase due to billings arising during the period in excess of revenue recognized

 

 
78,078

 

Amounts transferred from contract assets to receivables
(154,817
)
 
(2,202
)
 

 

Currency effects and other, net
(4,356
)
 
(19
)
 
623

 
(12
)
Ending balance, March 31, 2019
$
224,850

 
$
8,746

 
$
207,742

 
$
1,358

_____________________________________
(1) Included in other assets, net.
(2) Included in retirement obligations and other liabilities.

3.
Dispositions
FPD Business Divestiture
On June 29, 2018, pursuant to a plan of sale approved by management, we executed an agreement to divest two FPD locations and associated product lines, including the related assets and liabilities.  This transaction did not meet the criteria for classification of assets held for sale as of June 30, 2018 due to a contingency that could have potentially impacted the final terms and/or timing of the divestiture. The sale transaction was completed on August 9, 2018. During the twelve months ended December 31, 2018, we recorded a pre-tax charge of $25.1 million, including a pre-tax charge of $17.4 million in the second quarter of 2018 and a loss on sale of the business of $7.7 million in the third quarter of 2018. The second quarter of 2018 pre-tax charge related to write-downs of inventory and long-lived assets to their estimated fair value, of which $7.7 million was recorded in cost of sales ("COS") and $9.7 million was recorded in selling, general and administrative ("SG&A").  The third quarter of 2018 pre-tax charge primarily related to working capital changes since the second quarter of 2018 and net cash transferred at the closing date of $3.7 million. The sale included a manufacturing facility in Germany and a related assembly facility in France. In 2017, net sales related to the business totaled approximately $42 million, although the business produced an operating loss in each of the last two fiscal years.

4.
Leases
We adopted the New Lease Standard effective January 1, 2019 utilizing the modified retrospective approach and have elected an initial application date of January 1, 2019. Adoption of the New Lease Standard resulted in an increase to total assets and liabilities due to the recording of lease ROU assets and lease liabilities of approximately $210 million as of January 1, 2019. Our adoption of the New Lease Standard included modification of certain accounting policies and practices, business processes, systems and controls in order to support compliance with the requirements.
We have elected the package of three practical expedients for transition, which include the carry forward of our leases without reassessing whether any contracts are leases or contain leases, lease classification and initial direct costs. We have elected the transition practical expedient to apply hindsight when determining the lease term and when assessing impairment of ROU assets at the adoption date, which allows us to update our assessments according to new information and changes in facts and circumstances that have occurred since lease inception. We have certain land easements that have historically been accounted for as finite-lived intangible assets.  We have elected the practical expedient related to land easements, allowing us to carry forward our accounting treatment for land easements on existing agreements as intangible assets.  Any new or modified land easements will be accounted for as leases under the New Lease Standard.

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Presentation of Leases
We have operating and finance leases for certain manufacturing facilities, offices, service and quick response centers, machinery, equipment and automobiles. Our leases have remaining lease terms of 1 year to 35 years. The terms and conditions of our leases may include options to extend or terminate the lease which are considered and included in the lease term when these options are reasonably certain of exercise.
We determine if a contract is (or contains) a lease at inception by evaluating whether the contract conveys the right to control the use of an identified asset. For all classes of leased assets, we have elected the practical expedient to account for any non-lease components in the contract together with the related lease component in the same unit of account. For lease contracts containing more than one lease component, we allocate the contract consideration to each of the lease components on the basis of relative standalone prices in order to identify the lease payments for each lease component.
ROU assets and lease liabilities are recognized in our condensed consolidated balance sheets at the commencement date based on the present value of remaining lease payments over the lease term. Additionally, ROU assets include any lease payments made at or before the commencement date, as well as any initial direct costs incurred, and are reduced by any lease incentives received. As most of our operating leases do not provide an implicit rate, we apply our incremental borrowing rate to determine the present value of remaining lease payments. Our incremental borrowing rate is determined based on information available at the commencement date of the lease.
Operating leases are included in operating lease right-of-use assets, net, other current liabilities and operating lease liabilities in our condensed consolidated balance sheets. Finance leases are included in property plant and equipment, debt due within one year and long-term debt due after one year in our condensed consolidated balance sheets.
For all classes of leased assets, we have applied an accounting policy election to exclude short-term leases from recognition in our condensed consolidated balance sheets. A short-term lease has a lease term of 12 months or less at the commencement date and does not include a purchase option that is reasonably certain of exercise. We recognize short-term lease expense in our condensed consolidated income statements on a straight-line basis over the lease term. Our short-term lease expense and short-term lease commitments as of March 31, 2019 are immaterial.
We have certain lease contracts with terms and conditions that provide for variability in the payment amount based on changes in facts or circumstances occurring after the commencement date. These variable lease payments are recognized in our condensed consolidated income statements as the obligation is incurred.
We have certain lease contracts where we provide a guarantee to the lessor that the value of an underlying asset will be at least a specified amount at the end of the lease. Estimated amounts expected to be paid for residual value guarantees are included in lease liabilities and ROU assets.
As of March 31, 2019, we had $34.7 million of legally binding minimum lease payments for operating leases signed but not yet commenced. We did not have material subleases, leases that imposed significant restrictions or covenants, material related party leases or sale-leaseback arrangements.


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Other information related to our leases for the three months for the period ended March 31, 2019 is as follows:
(Amounts in thousands)
 
Operating Leases:
 
ROU assets recorded under operating leases
$
208,045

Accumulated amortization associated with operating leases
(9,389
)
Total operating leases ROU assets, net
$
198,656

 
 
Liabilities recorded under operating leases (current)
$
37,807

Liabilities recorded under operating leases (non-current)
160,315

Total operating leases liabilities
$
198,122

 
 
Finance Leases: 
 
ROU assets recorded under finance leases
$
15,339

Accumulated depreciation associated with finance leases
(7,229
)
Total finance leases ROU assets, net(1)
$
8,110

 
 
Total finance leases liabilities(2)
$
8,080

 
 
Operating Lease Costs:
 
Fixed lease expense(3)
$
15,209

Variable lease expense(3)
1,575

Total operating lease expense
$
16,784

 
 
Finance Lease Costs:
 
Depreciation of finance lease ROU assets(3)
$
1,157

Interest on lease liabilities(4)
78

Total finance lease expense
$
1,235

_____________________
(1) Included in property plant and equipment, net
(2) Included in debt due within one year and long-term debt due after one year, accordingly
(3) Included in cost of sales and selling, general and administrative expense, accordingly
(4) Included in interest expense









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(Amounts in thousands, except lease term and discount rate)
 
Supplemental cash flows information:
 
Cash paid for amounts included in the measurement of lease liabilities:
 
Operating cash flows from operating leases(1)
$
16,736

Financing cash flows from finance leases(2)
1,124

ROU assets obtained in exchange for lease obligations:
 
Operating leases
2,922

Finance leases
3,580

Weighted average remaining lease term (in years)
 
Operating leases
9 years

Finance leases
3 years

Weighted average discount rate (percent)
 
Operating leases
4.5
%
Finance leases
3.6
%
_____________________
(1) Included in our condensed consolidated statement of cash flows, operating activities, prepaid expenses and other assets, net and retirement obligations and other
(2) Included in our condensed consolidated statement of cash flows, financing activities, payments under other financing arrangements
 
Future undiscounted lease payments under operating and finance leases as of March 31, 2019 were as follows:
Year ending December 31,
Operating
Leases
 
Finance Leases
2019 (excluding the three months ended March 31, 2019)
$
39,503

 
$
3,694

2020
37,280

 
3,381

2021
29,229

 
1,441

2022
23,537

 
651

2023
19,843

 
184

Thereafter
103,411

 
14

Total future minimum lease payments
$
252,803

 
$
9,365

Less: Imputed interest
(54,681
)
 
(1,285
)
Total
$
198,122

 
$
8,080

 
 
 
 
Other current liabilities
$
37,807

 
$

Operating lease liabilities
160,315

 

Debt due within one year

 
3,915

Long-term debt due after one year

 
4,165

Total
$
198,122

 
$
8,080

 
 
 
 
The future minimum lease payments as of December 31, 2018 were as follows:
 
 
 
 
2019
 
 
$
68,443

2020
 
 
49,874

2021
 
 
38,446

2022
 
 
28,496

2023
 
 
21,473

Thereafter
 
 
66,518

Total future minimum lease payments
 
 
$
273,250


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5.
Stock-Based Compensation Plans
We maintain the Flowserve Corporation Equity and Incentive Compensation Plan (the "2010 Plan"), which is a shareholder-approved plan authorizing the issuance of up to 8,700,000 shares of our common stock in the form of restricted shares, restricted share units and performance-based units (collectively referred to as "Restricted Shares"), incentive stock options, non-statutory stock options, stock appreciation rights and bonus stock. Of the 8,700,000 shares of common stock authorized under the 2010 Plan, 1,535,244 were available for issuance as of March 31, 2019. In 2016, the long-term incentive program was amended to allow Restricted Shares granted after January 1, 2016 to employees who retire and have achieved at least 55 years of age and 10 years of service to continue to vest over the original vesting period ("55/10 Provision"). As of March 31, 2019, 114,943 stock options were outstanding, with a grant date fair value of $2.0 million, which is expected to be recognized over a weighted-average period of approximately one year. No stock options were granted during the three months ended March 31, 2019 and 2018. No stock options vested during the three months ended March 31, 2019 and 2018.
 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 $45.7 million and $24.3 million at March 31, 2019 and December 31, 2018, respectively, which is expected to be recognized over a weighted-average period of approximately two years. These amounts will be recognized into net earnings in prospective periods as the awards vest. The total fair value of Restricted Shares vested during the three months ended March 31, 2019 and 2018 was $13.8 million and $10.7 million, respectively.
We recorded stock-based compensation expense of $6.0 million ($7.6 million pre-tax) and $3.1 million ($4.0 million pre-tax) for the three months ended March 31, 2019 and 2018, respectively. Performance-based shares granted in 2016 did not fully vest due to the unachievement of certain performance targets, resulting in 115,302 forfeited shares and a $4.5 million reduction of stock-based compensation expense for the three months ended March 31, 2019. Performance-based shares granted in 2015 did not vest due to performance targets not being achieved, resulting in 100,033 forfeited shares and a $5.4 million reduction of stock-based compensation expense for the three months ended March 31, 2018.
The following table summarizes information regarding Restricted Shares:
 
Three Months Ended March 31, 2019
 
Shares
 
Weighted Average
Grant-Date Fair
Value
Number of unvested shares:
 
 
 
Outstanding - January 1, 2019
1,530,214

 
$
45.06

Granted
729,855

 
46.94

Vested
(326,919
)
 
42.29

Forfeited
(127,888
)
 
39.82

Outstanding as of March 31, 2019
1,805,262

 
$
46.69


Unvested Restricted Shares outstanding as of March 31, 2019 included approximately 682,000 units with performance-based vesting provisions. Performance-based units are issuable in common stock and vest upon the achievement of pre-defined performance targets. Performance-based units granted in 2017 and after have performance targets based on our average return on invested capital and our total shareholder return ("TSR") over a three-year period. Most unvested units were granted in three annual grants since January 1, 2017 and have a vesting percentage between 0% and 200% depending on the achievement of the specific performance targets. Except for shares granted under the 55/10 Provision, compensation expense is recognized ratably over a cliff-vesting period of 36 months, based on the fair value of our common stock on the date of grant, as adjusted for actual forfeitures. During the performance period, earned and unearned compensation expense is adjusted based on changes in the expected achievement of the performance targets for all performance-based units granted except for the TSR-based units. Vesting provisions range from 0 to approximately 1,364,000 shares based on performance targets. As of March 31, 2019, we estimate vesting of approximately 682,000 shares based on expected achievement of performance targets.


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6.
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 7 to our consolidated financial statements included in our 2018 Annual Report and Note 8 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.
Foreign exchange contracts with third parties had a notional value of $288.1 million and $280.9 million at March 31, 2019 and December 31, 2018, respectively. At March 31, 2019, the length of foreign exchange contracts currently in place ranged from four days to 18 months.
We are exposed to risk from credit-related losses resulting from nonperformance by counterparties to our financial instruments. We perform credit evaluations of our counterparties under foreign exchange contracts agreements and expect all counterparties to meet their obligations. We have not experienced credit losses from our counterparties.
The fair values of foreign exchange contracts are summarized below:
 
March 31,
 
December 31,
(Amounts in thousands)
2019
 
2018
Current derivative assets
$
906

 
$
535

Noncurrent derivative assets

 
5

Current derivative liabilities
2,878

 
3,285

Noncurrent derivative liabilities
104

 
2

Current and noncurrent derivative assets are reported in our condensed consolidated balance sheets in prepaid expenses and other and other assets, net, respectively. Current and noncurrent derivative liabilities are reported in our condensed consolidated balance sheets in accrued liabilities and retirement obligations and other liabilities, respectively.
The impact of net changes in the fair values of foreign exchange contracts are summarized below:
 
Three Months Ended March 31,
(Amounts in thousands)
2019
 
2018
Gain (loss) recognized in income
$
(1,281
)
 
$
(1,104
)
Gains and losses recognized in our condensed consolidated statements of income for foreign exchange contracts are classified as other expense, net.
In March 2015, we designated €255.7 million of our €500.0 million Euro senior notes discussed in Note 7 as a net investment hedge of our investments in certain of our international subsidiaries that use the Euro as their functional currency. We used the spot method to measure the effectiveness of our net investment hedge. Under this method, for each reporting period, the change in the carrying value of the Euro senior notes due to remeasurement of the effective portion is reported in accumulated other comprehensive loss on our condensed consolidated balance sheet and the remaining change in the carrying value of the ineffective portion, if any, is recognized in other expense, net in our condensed consolidated statement of income. We evaluate the effectiveness of our net investment hedge on a prospective basis at the beginning of each quarter. We did not record any ineffectiveness for the three months ended March 31, 2019 and 2018.


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Table of Contents

7.
Debt
Debt, including finance lease obligations, consisted of:
 
March 31,
 
  December 31,  
(Amounts in thousands, except percentages)
2019
 
2018
1.25% EUR Senior Notes due March 17, 2022, net of unamortized discount and debt issuance costs of $3,539 and $3,914
$
557,311

 
$
569,536

3.50% USD Senior Notes due September 15, 2022, net of unamortized discount and debt issuance costs of $2,425 and $2,589
497,575

 
497,411

4.00% USD Senior Notes due November 15, 2023, net of unamortized discount and debt issuance costs of $2,090 and $2,192
297,910

 
297,808

Term Loan Facility, interest rate of 4.10% at March 31, 2019 and 4.30% at December 31, 2018, net of debt issuance costs of $187 and $249
89,813

 
104,751

Finance lease obligations and other borrowings
21,826

 
13,541

Debt and finance lease obligations
1,464,435

 
1,483,047

Less amounts due within one year
72,197

 
68,218

Total debt due after one year
$
1,392,238

 
$
1,414,829

Senior Credit Facility
As discussed in Note 11 to our consolidated financial statements included in our 2018 Annual Report, our amended credit agreement provides for an $195.0 million term loan (“Term Loan Facility”) and a $800.0 million revolving credit facility (“Revolving Credit Facility” and, together with the Term Loan Facility, the “Senior Credit Facility”) with a maturity date of October 14, 2020. As of March 31, 2019 and December 31, 2018, we had no revolving loans outstanding under the Revolving Credit Facility. We had outstanding letters of credit of $84.0 million and $92.9 million at March 31, 2019 and December 31, 2018, respectively, which together with financial covenant limitations based on the terms of our Senior Credit Facility, contributed to the reduction of our borrowing capacity to $575.3 million and $513.7 million, respectively. Our compliance with applicable financial covenants under the Senior Credit Facility is tested quarterly, and we complied with all applicable covenants as of March 31, 2019.
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 0.20% (per annum) during the period ended March 31, 2019. During the three months ended March 31, 2019, we made scheduled repayments of $15.0 million under our Term Loan Facility. We have scheduled repayments of $15.0 million due in each of the next four quarters on our Term Loan Facility.

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 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 6.
Our financial instruments are presented at fair value in our condensed consolidated balance sheets, with the exception of our long-term debt. The estimated fair value of our long-term debt, excluding the Senior Notes, approximates the carrying value and is classified as Level II under the fair value hierarchy. The carrying value of our debt is included in Note 7. The estimated fair value of our Senior Notes at March 31, 2019 was $1,366.1 million compared to the carrying value of $1,352.8 million. The estimated fair value of the Senior Notes is based on Level I quoted market rates. The carrying amounts of our other financial instruments (e.g., cash and cash equivalents, accounts receivable, net, accounts payable and short-term debt) approximated fair value due to their short-term nature at March 31, 2019 and December 31, 2018.


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9.
Inventories
Inventories, net consisted of the following:
 
March 31,
 
  December 31,  
(Amounts in thousands)
2019
 
2018
Raw materials
$
324,935

 
$
310,204

Work in process
242,181

 
191,660

Finished goods
186,739

 
205,814

Less: Excess and obsolete reserve
(73,664
)
 
(73,807
)
Inventories, net
$
680,191

 
$
633,871


10.
Earnings Per Share
The following is a reconciliation of net earnings of Flowserve Corporation and weighted average shares for calculating net earnings per common share. Earnings per weighted average common share outstanding was calculated as follows:
 
Three Months Ended March 31,
(Amounts in thousands, except per share data)
2019
 
2018
Net earnings of Flowserve Corporation
$
57,261

 
$
15,143

Dividends on restricted shares not expected to vest

 

Earnings attributable to common and participating shareholders
$
57,261

 
$
15,143

Weighted average shares:
 
 
 
Common stock
130,962

 
130,713

Participating securities
20

 
48

Denominator for basic earnings per common share
130,982

 
130,761

Effect of potentially dilutive securities
550

 
334

Denominator for diluted earnings per common share
131,532

 
131,095

Earnings per common share:
 
 
 
Basic
$
0.44

 
$
0.12

Diluted
0.44

 
0.12

 
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.

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. While the overall number of asbestos-related claims has generally declined in recent years, there can be no assurance that this trend will continue, or that the average cost per claim will not further increase. Asbestos-containing materials incorporated into any such products were encapsulated and used as internal components of process equipment, and we do not believe that any significant emission of asbestos fibers occurred during the use of this equipment.
Our practice is to vigorously contest and resolve these claims, and we have been successful in resolving a majority of claims with little or no payment. Historically, a high percentage of resolved claims have been covered by applicable insurance or indemnities from other companies, and we believe that a substantial majority of existing claims should continue to be covered by insurance or indemnities, in whole or in part. Accordingly, we have recorded a liability for our estimate of the most likely settlement of asserted claims and a related receivable from insurers or other companies for our estimated recovery, to the extent we believe that the amounts of recovery are probable. While unfavorable rulings, judgments or settlement terms regarding these claims could have a material adverse impact on our business, financial condition, results of operations and cash flows, we currently believe the likelihood is remote.

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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 we expect that future claims would also be subject to then existing indemnities and insurance coverage.
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 2018 Annual Report, in 2016 we terminated an employee of an overseas subsidiary after uncovering actions that violated our Code of Business Conduct and may have violated the Foreign Corrupt Practices Act.  We completed our internal investigation into the matter, self-reported the potential violation to the United States Department of Justice (the “DOJ”) and the SEC, and continue to cooperate with the DOJ and SEC.  We previously received a subpoena from the SEC requesting additional information and documentation related to the matter and have completed our response to the subpoena.  We currently believe that this matter will not have a material adverse financial impact on the Company, but there can be no assurance that the Company will not be subjected to monetary penalties and additional costs. 
We are also a defendant in a number of other lawsuits, including product liability claims, that are insured, subject to the applicable deductibles, arising in the ordinary course of business, and we are also involved in other uninsured routine litigation incidental to our business. We currently believe none of such litigation, either individually or in the aggregate, is material to our business, operations or overall financial condition. However, litigation is inherently unpredictable, and resolutions or dispositions of claims or lawsuits by settlement or otherwise could have an adverse impact on our financial position, results of operations or cash flows for the reporting period in which any such resolution or disposition occurs.
Although none of the aforementioned potential liabilities can be quantified with absolute certainty except as otherwise indicated above, we have established reserves covering exposures relating to contingencies, to the extent believed to be reasonably estimable and probable based on past experience and available facts. While additional exposures beyond these reserves could exist, they currently cannot be estimated. We will continue to evaluate and update the reserves as necessary and appropriate.

12.
Retirement and Postretirement Benefits
Components of the net periodic cost for retirement and postretirement benefits for the three months ended March 31, 2019 and 2018 were as follows:
 
U.S.
Defined Benefit Plans
 
Non-U.S.
Defined Benefit Plans
 
Postretirement
Medical Benefits
(Amounts in millions) 
2019
 
2018
 
2019
 
2018
 
2019
 
2018
Service cost
$
5.6

 
$
6.0

 
$
1.5

 
$
1.8

 
$

 
$

Interest cost
4.5

 
4.0

 
2.2

 
2.3

 
0.2

 
0.2

Expected return on plan assets
(6.5
)
 
(6.5
)
 
(1.9
)
 
(2.2
)
 

 

Amortization of prior service cost

 

 
0.1

 

 

 

Amortization of unrecognized net loss (gain)
0.9

 
1.4

 
0.7

 
0.9

 
(0.1
)
 
(0.1
)
Net periodic cost recognized
$
4.5

 
$
4.9

 
$
2.6

 
$
2.8

 
$
0.1

 
$
0.1

 
The components of net periodic cost for retirement and postretirement benefits other than service costs are included in other expense, net in our condensed consolidated statement of income.


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Table of Contents

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. Dividends declared per share were $0.19 for both three months ending March 31, 2019 and 2018.
Share Repurchase Program – On November 13, 2014, our Board of Directors approved a $500.0 million share repurchase authorization. Our share repurchase program does not have an expiration date, and we reserve the right to limit or terminate the repurchase program at any time without notice. We had no repurchases of shares of our outstanding common stock for both of the three months ended March 31, 2019 and 2018. As of March 31, 2019, we had $160.7 million of remaining capacity under our current share repurchase program.

14.
Income Taxes
On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act of 2017 (the “Tax Reform Act”), which significantly changed U.S. tax law. The Tax Reform Act, among other things, lowered the Company’s U.S. statutory federal income tax rate from 35% to 21% effective January 1, 2018, while implementing a modified territorial tax system. The Tax Reform Act also provides for two new anti-base erosion provisions, the global intangible low-taxed income (“GILTI”) provision and the base-erosion and anti-abuse tax (“BEAT”) provision which effectively creates a new minimum tax on certain future foreign earnings.
For the three months ended March 31, 2019, we earned $76.1 million before taxes and provided for income taxes of $16.6 million resulting in an effective tax rate of 21.8%. The effective tax rate varied from the U.S. federal statutory rate for the three months ended March 31, 2019 primarily due to the BEAT provision and state tax, partially offset by the net impact of foreign operations.
 
For the three months ended March 31, 2018, we earned $25.0 million before taxes and provided for income taxes of $8.6 million resulting in an effective tax rate of 34.2%. The effective tax rate varied from the U.S. federal statutory rate for the three months ended March 31, 2018 primarily due to the net impact of foreign operations, including losses in certain foreign jurisdictions for which no tax benefit was provided.
As of March 31, 2019, the amount of unrecognized tax benefits decreased by $0.5 million from December 31, 2018. With limited exception, we are no longer subject to U.S. federal income tax audits for years through 2016, state and local income tax audits for years through 2012 or non-U.S. income tax audits for years through 2011. We are currently under examination for various years in Austria, Canada, France, Germany, India, Indonesia, Italy, Mexico, Netherlands, Philippines, Saudi Arabia, Singapore, Thailand, 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 $18.2 million within the next 12 months.

15.
Segment Information

In connection with the Flowserve 2.0 Transformation program discussed in Note 17, we have determined that there are meaningful operational synergies and benefits to combining our previously reported EPD and IPD segments into one reportable segment, FPD. During the quarter ended March 31, 2019 the reorganization was implemented and as a result we report our financial information reflecting two operating segment structure, FPD and FCD. The reorganization of the segments reflects how our chief operating decision maker (Chief Executive Officer) regularly reviews financial information to allocate resources and assess performance.

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The following is a summary of the financial information of the reportable segments reconciled to the amounts reported in the condensed consolidated financial statements:
Three Months Ended March 31, 2019
 (Amounts in thousands)
FPD
 
FCD
 
Subtotal–Reportable Segments
 
Eliminations and All Other
 
Consolidated Total
Sales to external customers
$
608,759

 
$
281,292

 
$
890,051

 
$

 
$
890,051

Intersegment sales
650

 
828

 
1,478

 
(1,478
)
 

Segment operating income (loss)
80,463

 
44,421

 
124,884

 
(33,653
)
 
91,231

 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2018
 (Amounts in thousands)
FPD
 
FCD
 
Subtotal–Reportable Segments
 
Eliminations and All Other
 
Consolidated Total
Sales to external customers
$
644,040

 
$
275,914

 
$
919,954

 
$

 
$
919,954

Intersegment sales
409

 
1,319

 
1,728

 
(1,728
)
 

Segment operating income (loss)
34,705

 
33,889

 
68,594

 
(23,169
)
 
45,425

 
16.
Accumulated Other Comprehensive Loss
The following table presents the changes in accumulated other comprehensive loss ("AOCL"), net of tax for the three months ended March 31, 2019 and 2018:
 
2019
 
2018
(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
$
(447,925
)
 
$
(120,647
)
 
$
(858
)
 
$
(569,430
)
 
$
(384,779
)
 
$
(115,755
)
 
$
(1,090
)
 
$
(501,624
)
Other comprehensive income (loss) before reclassifications
6,945

 
(269
)
 
62

 
6,738

 
19,449

 
(2,022
)
 
28

 
17,455

Amounts reclassified from AOCL

 
1,486

 

 
1,486

 

 
1,712

 

 
1,712

Net current-period other comprehensive income (loss)
6,945

 
1,217

 
62

 
8,224

 
19,449

 
(310
)
 
28

 
19,167

Balance - March 31
$
(440,980
)
 
$
(119,430
)
 
$
(796
)
 
$
(561,206
)
 
$
(365,330
)
 
$
(116,065
)
 
$
(1,062
)
 
$
(482,457
)
_______________________________________
(1) Includes foreign currency translation adjustments attributable to noncontrolling interests of $4.5 million and $3.8 million for January1, 2019 and 2018, respectively, and $5.2 million and $4.7 million at March 31, 2019 and 2018, respectively. Includes net investment hedge losses of $12.2 million and $33.7 million, net of deferred taxes, at March 31, 2019 and 2018, respectively. Amounts in parentheses indicate debits.


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Table of Contents

The following table presents the reclassifications out of AOCL:
 
 
 
 
Three Months Ended March 31,
(Amounts in thousands)
 
Affected line item in the statement of income
 
2019(1)
 
2018(1)
Pension and other postretirement effects
 
 
 
 
 
 
Amortization of actuarial losses(2)
 
Other income (expense), net
 
$
(1,555
)
 
$
(2,195
)
  Prior service costs(2)
 
Other income (expense), net
 
(138
)
 
(81
)


 
Tax benefit
 
207

 
564



 
Net of tax
 
$
(1,486
)
 
$
(1,712
)
_______________________________________
(1) Amounts in parentheses indicate decreases to income. None of the reclass amounts have a noncontrolling interest component.
(2) These accumulated other comprehensive loss components are included in the computation of net periodic pension cost. See Note 12 for additional details.
 
 
 

17.
Realignment and Transformation Programs
In the second quarter of 2018, we launched and 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. We anticipate that the Flowserve 2.0 Transformation will result in restructuring charges, non-restructuring charges and other related transformation expenses (primarily professional services, project management and related travel expenses). For the three months ended March 31, 2019 and 2018, we incurred Flowserve 2.0 Transformation related expenses of $8.4 million and $0.5 million, respectively, primarily consisting of professional services and project management costs recorded in SG&A. We are currently evaluating the total investment in the various initiatives associated with this program.

In 2015, we initiated realignment programs to better align costs and improve long-term efficiency, including manufacturing optimization through the consolidation of facilities, reduction in our workforce and divestiture of certain non-strategic assets (the “Realignment Programs”).  The Realignment Programs consist of both restructuring and non-restructuring charges. Restructuring charges represent costs associated with the relocation or reorganization of certain business activities and facility closures and include related severance costs. Non-restructuring charges are primarily employee severance associated with workforce reductions to reduce redundancies. Expenses are primarily reported in COS or SG&A, as applicable, in our condensed consolidated statements of income. These Realignment Programs have been substantially completed as of December 31, 2018. We estimate that the total investment in these programs will be approximately $350 million. As of March 31, 2019, we have incurred charges of $335.8 million since the inception of the programs. 

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Table of Contents

Generally, the aforementioned charges will be paid in cash, except for asset write-downs, which are non-cash charges. The following is a summary of total charges, net of adjustments, related to the Realignment and Flowserve 2.0 Transformation Programs charges:
 
Three Months Ended March 31, 2019
 (Amounts in thousands)
FPD
 
FCD
 
Subtotal–Reportable Segments
 
Eliminations and All Other
 
Consolidated Total
Realignment Charges
 
 
 
 
 
 
 
 
 
Restructuring Charges
 
 
 
 
 
 
 
 
 
     COS
$
2,622

 
$
456

 
$
3,078

 
$

 
$
3,078

     SG&A(1)
(18,471
)
 
338

 
(18,133
)
 

 
(18,133
)
 
$
(15,849
)
 
$
794

 
$
(15,055
)
 
$

 
$
(15,055
)
Non-Restructuring Charges
 

 
 

 
 
 
 
 
 

     COS
$
2,396

 
$
26

 
$
2,422

 
$

 
$
2,422

     SG&A
174

 

 
174

 
529

 
703

 
$
2,570

 
$
26

 
$
2,596

 
$
529

 
$
3,125

Total Realignment Charges
 
 
 
 
 
 
 
 
 
     COS
$
5,018

 
$
482

 
$
5,500

 
$

 
$
5,500

     SG&A
(18,297
)
 
338

 
(17,959
)
 
529

 
$
(17,430
)
Total
$
(13,279
)
 
$
820

 
$
(12,459
)
 
$
529

 
$
(11,930
)
 
 
 
 
 
 
 
 
 
 
Transformation Charges
 
 
 
 
 
 
 
 
 
     SG&A
$

 
$

 
$

 
$
8,413

 
$
8,413

 
$

 
$

 
$

 
$
8,413

 
$
8,413

 
 
 
 
 
 
 
 
 
 
Total Realignment and Transformation Charges
 
 
 
 
 
 
 
 
 
     COS
$
5,018

 
$
482

 
$
5,500

 
$

 
$
5,500

     SG&A
(18,297
)
 
338

 
(17,959
)
 
8,942

 
(9,017
)
Total
$
(13,279
)
 
$
820

 
$
(12,459
)
 
$
8,942

 
$
(3,517
)
______________________________________
(1) Primarily consists of gains from the sales of non-strategic manufacturing facilities that are included in our Realignment Programs.

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Table of Contents

 
Three Months Ended March 31, 2018
 (Amounts in thousands)
FPD
 
FCD
 
Subtotal–Reportable Segments
 
Eliminations and All Other
 
Consolidated Total
Realignment Charges
 
 
 
 
 
 
 
 
 
Restructuring Charges
 
 
 
 
 
 
 
 
 
     COS
$
1,218

 
$
1,746

 
$
2,964

 
$

 
$
2,964

     SG&A
(42
)
 
229

 
187

 

 
187

 
$
1,176

 
$
1,975

 
$
3,151

 
$

 
$
3,151

Non-Restructuring Charges
 

 
 

 
 
 
 
 
 

     COS
$
4,029

 
$
163

 
$
4,192

 
$

 
$
4,192

     SG&A
2,902

 
198

 
3,100

 
1,031

 
4,131

 
$
6,931

 
$
361

 
$
7,292

 
$
1,031

 
$
8,323

Total Realignment Charges
 
 
 
 
 
 
 
 
 
     COS
$
5,247

 
$
1,909

 
$
7,156

 
$

 
$
7,156

     SG&A
2,860

 
427

 
3,287

 
1,031

 
$
4,318

Total
$
8,107

 
$
2,336

 
$
10,443

 
$
1,031

 
$
11,474

 
 
 
 
 
 
 
 
 
 
Transformation Charges
 
 
 
 
 
 
 
 
 
     SG&A
$

 
$

 
$

 
$
500

 
$
500

 
$

 
$

 
$

 
$
500

 
$
500

 
 
 
 
 
 
 
 
 
 
Total Realignment and Transformation Charges
 
 
 
 
 
 
 
 
 
     COS
$
5,247

 
$
1,909

 
$
7,156

 
$

 
$
7,156

     SG&A
2,860

 
$
427

 
$
3,287

 
$
1,531

 
$
4,818

Total
$
8,107

 
$
2,336

 
$
10,443

 
$
1,531

 
$
11,974

 
 


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Table of Contents

The following is a summary of total inception to date charges, net of adjustments, related to the Realignment Programs:
 
Inception to Date
 (Amounts in thousands)
FPD
 
FCD
 
Subtotal–Reportable Segments
 
Eliminations and All Other
 
Consolidated Total
Realignment Charges
 
 
 
 
 
 
 
 
 
Restructuring Charges
 
 
 
 
 
 
 
 
 
     COS
$
111,664

 
$
27,481

 
$
139,145

 
$

 
$
139,145

     SG&A
18,439

 
9,793

 
28,232

 
317

 
28,549

     Income tax expense(1)
18,700

 
1,800

 
20,500

 

 
20,500

 
$
148,803

 
$
39,074

 
$
187,877

 
$
317

 
$
188,194

Non-Restructuring Charges
 

 
 

 
 
 
 
 
 

     COS
$
70,880

 
$
13,744

 
$
84,624

 
$
8

 
$
84,632

     SG&A
39,478

 
7,512

 
46,990

 
16,031

 
63,021

 
$
110,358

 
$
21,256

 
$
131,614

 
$
16,039

 
$
147,653

Total Realignment Charges
 
 
 
 
 
 
 
 
 
     COS
$
182,544

 
$
41,225

 
$
223,769

 
$
8

 
$
223,777

     SG&A
57,917

 
17,305

 
75,222

 
16,348

 
91,570

     Income tax expense(1)
18,700

 
1,800

 
20,500

 

 
20,500

Total
$
259,161

 
$
60,330

 
$
319,491

 
$
16,356

 
$
335,847

____________________________
(1) Income tax expense includes exit taxes as well as non-deductible costs.
Restructuring charges represent costs associated with the relocation or reorganization of certain business activities and facility closures and include costs related to employee severance at closed facilities, contract termination costs, asset write-downs and other costs. Severance costs primarily include costs associated with involuntary termination benefits. Contract termination costs include costs related to termination of operating leases or other contract termination costs. Asset write-downs include accelerated depreciation of fixed assets, accelerated amortization of intangible assets, divestiture of certain non-strategic assets and inventory write-downs. Other costs generally include costs related to employee relocation, asset relocation, vacant facility costs (i.e., taxes and insurance) and other charges.
The following is a summary of restructuring charges, net of adjustments, for the Realignment Programs:
 
Three Months Ended March 31, 2019
 (Amounts in thousands)
Severance
 
Contract Termination
 
Asset Write-Downs (Gains)
 
Other
 
Total
     COS
$
1,679

 
$
39

 
$
233

 
$
1,127

 
$
3,078

     SG&A(1)
316