FLS 3.31.2014 Financial Statements
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2014 |
OR
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¨ | 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)
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| | |
New York | | 31-0267900 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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5215 N. O’Connor Blvd., Suite 2300, Irving, Texas | | 75039 |
(Address of principal executive offices) | | (Zip Code) |
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| (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.
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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 April 17, 2014, there were 137,332,096 shares of the issuer’s common stock outstanding.
FLOWSERVE CORPORATION
FORM 10-Q
TABLE OF CONTENTS
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EX-31.1 | |
EX-31.2 | |
EX-32.1 | |
EX-32.2 | |
EX-101 INSTANCE DOCUMENT | |
EX-101 SCHEMA DOCUMENT | |
EX-101 CALCULATION LINKBASE DOCUMENT | |
EX-101 LABELS LINKBASE DOCUMENT | |
EX-101 PRESENTATION LINKBASE DOCUMENT | |
EX-101 DEFINITION LINKBASE DOCUMENT | |
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PART I — FINANCIAL INFORMATION
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Item 1. | Financial Statements. |
FLOWSERVE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
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| | | | | | | |
(Amounts in thousands, except per share data) | Three Months Ended March 31, |
| 2014 | | 2013 |
Sales | $ | 1,068,136 |
| | $ | 1,096,596 |
|
Cost of sales | (691,014 | ) | | (723,288 | ) |
Gross profit | 377,122 |
| | 373,308 |
|
Selling, general and administrative expense | (216,227 | ) | | (234,509 | ) |
Net earnings from affiliates (Note 2) | 3,431 |
| | 31,680 |
|
Operating income | 164,326 |
| | 170,479 |
|
Interest expense | (15,149 | ) | | (12,092 | ) |
Interest income | 331 |
| | 274 |
|
Other expense, net | (2,905 | ) | | (11,028 | ) |
Earnings before income taxes | 146,603 |
| | 147,633 |
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Provision for income taxes | (38,015 | ) | | (48,733 | ) |
Net earnings, including noncontrolling interests | 108,588 |
| | 98,900 |
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Less: Net earnings attributable to noncontrolling interests | (854 | ) | | (1,111 | ) |
Net earnings attributable to Flowserve Corporation | $ | 107,734 |
| | $ | 97,789 |
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Net earnings per share attributable to Flowserve Corporation common shareholders: | | | |
Basic | $ | 0.78 |
| | $ | 0.68 |
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Diluted | 0.78 |
| | 0.67 |
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Cash dividends declared per share | $ | 0.16 |
| | $ | 0.14 |
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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
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| | | | | | | |
(Amounts in thousands) | Three Months Ended March 31, |
| 2014 | | 2013 |
Net earnings, including noncontrolling interests | $ | 108,588 |
| | $ | 98,900 |
|
Other comprehensive income (loss): | | | |
Foreign currency translation adjustments, net of taxes of $(1,786) and $22,790, respectively | 2,951 |
| | (37,661 | ) |
Pension and other postretirement effects, net of taxes of $(938) and $(2,771), respectively | 2,779 |
| | 6,732 |
|
Cash flow hedging activity, net of taxes of $(71) and $(173), respectively | 168 |
| | 241 |
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Other comprehensive income (loss) | 5,898 |
| | (30,688 | ) |
Comprehensive income, including noncontrolling interests | 114,486 |
| | 68,212 |
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Comprehensive income attributable to noncontrolling interests | (1,030 | ) | | (1,344 | ) |
Comprehensive income attributable to Flowserve Corporation | $ | 113,456 |
| | $ | 66,868 |
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See accompanying notes to condensed consolidated financial statements.
FLOWSERVE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
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| | | | | | | |
(Amounts in thousands, except par value) | March 31, | | December 31, |
| 2014 | | 2013 |
ASSETS |
Current assets: | | | |
Cash and cash equivalents | $ | 164,416 |
| | $ | 363,804 |
|
Accounts receivable, net of allowance for doubtful accounts of $23,554 and $24,073, respectively | 1,064,216 |
| | 1,155,327 |
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Inventories, net | 1,121,248 |
| | 1,060,670 |
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Deferred taxes | 156,486 |
| | 157,448 |
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Prepaid expenses and other | 100,901 |
| | 110,133 |
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Total current assets | 2,607,267 |
| | 2,847,382 |
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Property, plant and equipment, net of accumulated depreciation of $852,042 and $849,863, respectively | 694,921 |
| | 716,289 |
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Goodwill | 1,101,434 |
| | 1,107,551 |
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Deferred taxes | 19,444 |
| | 19,533 |
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Other intangible assets, net | 155,495 |
| | 160,548 |
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Other assets, net | 180,847 |
| | 185,430 |
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Total assets | $ | 4,759,408 |
| | $ | 5,036,733 |
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LIABILITIES AND EQUITY |
Current liabilities: | | | |
Accounts payable | $ | 470,222 |
| | $ | 612,092 |
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Accrued liabilities | 756,420 |
| | 861,010 |
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Debt due within one year | 75,088 |
| | 72,678 |
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Deferred taxes | 12,280 |
| | 12,319 |
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Total current liabilities | 1,314,010 |
| | 1,558,099 |
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Long-term debt due after one year | 1,117,244 |
| | 1,127,619 |
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Retirement obligations and other liabilities | 465,281 |
| | 473,894 |
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Shareholders’ equity: | | | |
Common shares, $1.25 par value | 220,991 |
| | 220,991 |
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Shares authorized – 305,000 | | | |
Shares issued – 176,793 and 176,793, respectively | | | |
Capital in excess of par value | 464,281 |
| | 476,218 |
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Retained earnings | 3,070,775 |
| | 2,985,391 |
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Treasury shares, at cost – 40,476 and 39,630 shares, respectively | (1,693,994 | ) | | (1,600,266 | ) |
Deferred compensation obligation | 9,188 |
| | 9,522 |
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Accumulated other comprehensive loss | (215,755 | ) | | (221,477 | ) |
Total Flowserve Corporation shareholders’ equity | 1,855,486 |
| | 1,870,379 |
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Noncontrolling interests | 7,387 |
| | 6,742 |
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Total equity | 1,862,873 |
| | 1,877,121 |
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Total liabilities and equity | $ | 4,759,408 |
| | $ | 5,036,733 |
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See accompanying notes to condensed consolidated financial statements.
FLOWSERVE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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| | | | | | | |
(Amounts in thousands) | Three Months Ended March 31, |
| 2014 | | 2013 |
Cash flows – Operating activities: | | | |
Net earnings, including noncontrolling interests | $ | 108,588 |
| | $ | 98,900 |
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Adjustments to reconcile net earnings to net cash used by operating activities: | | | |
Depreciation | 23,058 |
| | 21,403 |
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Amortization of intangible and other assets | 4,305 |
| | 3,807 |
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Net loss on disposition of assets | 74 |
| | 236 |
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Gain on sale of business | (13,403 | ) | | — |
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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 | (8,353 | ) | | (6,818 | ) |
Stock-based compensation | 9,916 |
| | 8,035 |
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Net earnings from affiliates, net of dividends received | (1,986 | ) | | (3,066 | ) |
Change in assets and liabilities: | | | |
Accounts receivable, net | 77,264 |
| | 40,223 |
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Inventories, net | (76,990 | ) | | (83,502 | ) |
Prepaid expenses and other | (6,897 | ) | | (9,831 | ) |
Other assets, net | 4,025 |
| | 70 |
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Accounts payable | (123,050 | ) | | (103,881 | ) |
Accrued liabilities and income taxes payable | (77,552 | ) | | (55,413 | ) |
Retirement obligations and other liabilities | (4,437 | ) | | 10,102 |
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Net deferred taxes | 773 |
| | (25 | ) |
Net cash flows used by operating activities | (84,665 | ) | | (108,070 | ) |
Cash flows – Investing activities: | | | |
Capital expenditures | (31,663 | ) | | (34,258 | ) |
Proceeds from disposal of assets | 301 |
| | 212 |
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Payments for acquisition, net of cash acquired | — |
| | (10,143 | ) |
Proceeds from sale of business, net of cash divested | 46,805 |
| | — |
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Proceeds from equity investments in affiliates | — |
| | 46,240 |
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Net cash flows provided by investing activities | 15,443 |
| | 2,051 |
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Cash flows – Financing activities: | | | |
Excess tax benefits from stock-based compensation arrangements | 8,353 |
| | 6,818 |
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Payments on long-term debt | (10,000 | ) | | (5,000 | ) |
Proceeds from revolving credit facility | — |
| | 150,000 |
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Borrowings (payments) under other financing arrangements, net | 1,809 |
| | (4,013 | ) |
Repurchases of common shares | (109,605 | ) | | (155,552 | ) |
Payments of dividends | (19,387 | ) | | (17,514 | ) |
Other | (385 | ) | | (121 | ) |
Net cash flows used by financing activities | (129,215 | ) | | (25,382 | ) |
Effect of exchange rate changes on cash | (951 | ) | | (3,414 | ) |
Net change in cash and cash equivalents | (199,388 | ) | | (134,815 | ) |
Cash and cash equivalents at beginning of period | 363,804 |
| | 304,252 |
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Cash and cash equivalents at end of period | $ | 164,416 |
| | $ | 169,437 |
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See accompanying notes to condensed consolidated financial statements.
FLOWSERVE CORPORATION
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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1. | Basis of Presentation and Accounting Policies |
Basis of Presentation
The accompanying condensed consolidated balance sheet as of March 31, 2014, the related condensed consolidated statements of income and comprehensive income for the three months ended March 31, 2014 and 2013, and the condensed consolidated statements of cash flows for the three months ended March 31, 2014 and 2013, 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.
The accompanying condensed consolidated financial statements and notes in this Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2014 ("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 audited Annual Report on Form 10-K for the year ended December 31, 2013 ("2013 Annual Report").
As discussed in Note 15 to our consolidated financial statements included in our 2013 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 – 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 United States ("U.S.") dollars directly to Venezuelan customers. Our Venezuelan subsidiary's sales for the three months ended March 31, 2014 and total assets at March 31, 2014 represented less than 1% of consolidated sales and total assets for the same periods. Effective February 13, 2013, the Venezuelan government devalued its currency (bolivar) from 4.3 to 6.3 bolivars to the U.S. dollar. 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.
In the first quarter of 2014, the Venezuelan government expanded the use of periodic auctions for U.S. dollars conducted under the Complementary System of Foreign Currency Administration (“SICAD I”). At March 31, 2014 the SICAD I exchange rate was 10.7 bolivars to the U.S. dollar, compared with the official exchange rate of 6.3 bolivars to the U.S. dollar (“Official”). In addition, the Venezuelan government created a third currency exchange mechanism (“SICAD II”) that is currently being interpreted to be available to all entities for all transactions at an exchange rate that is significantly less favorable than the Official exchange rate or the SICAD I exchange rate.
As of March 31, 2014, we believe the Official exchange rate continues to be the most appropriate rate to remeasure the U.S. dollar value of the assets, liabilities and results of operations of our Venezuelan subsidiary. We are continuing to assess and monitor the ongoing impact of the recent changes in the Venezuelan foreign exchange market 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 exchange 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. For reference, if we were to remeasure our bolivar-denominated net monetary assets as of March 31, 2014 utilizing the SICAD I exchange rate, it is estimated that the resulting loss would have been approximately $3 million.
Accounting Policies
Significant accounting policies, for which no significant changes have occurred in the three months ended March 31, 2014, are detailed in Note 1 to our consolidated financial statements included in our 2013 Annual Report.
Accounting Developments
Pronouncements Implemented
In February 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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 effective January 1, 2014 did 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 effective January 1, 2014 did not have an impact on our consolidated financial condition and results of operations.
In July 2013, the FASB issued ASU No. 2013-11, "Income Taxes (Topic 740) - Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists," which provides guidance on the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. ASU No. 2013-11 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The ASU shall be applied prospectively to all unrecognized tax benefits that exist at the effective date. The adoption of ASU No. 2013-11 effective January 1, 2014 did not have an impact on our consolidated financial condition and results of operations.
In April 2014, the FASB issued ASU No. 2014-08, "Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360) - Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity," which provides guidance on the requirements for reporting discontinued operations. A discontinued operation may include a component of an entity or a group of components of an entity, or a business or nonprofit activity. A disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results when the component of an entity or group of components of an entity meets the criteria to be classified as held for sale, is disposed of by sale, or is disposed of other than by sale (e.g., by abandonment or in a distribution to owners in a spinoff). This ASU also introduces new disclosure requirements for discontinued operations. ASU No. 2014-08 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. The ASU shall be applied prospectively to (a) all disposals (or classifications as held for sale) of components of an entity and (b) businesses or nonprofit activities that, on acquisition, are classified as held for sale that occur after the effective date. Early adoption is permitted, but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued or available for issuance. We early adopted this ASU effective January 1, 2014 and it did not have an impact on our consolidated financial condition and results of operations.
Pronouncements Not Yet Implemented
As of March 31, 2014 there were no applicable pronouncements that have not yet been implemented.
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2. | Disposition, Acquisition and Exit of Joint Venture |
Effective March 31, 2014, we sold our Flow Control Division's ("FCD") Naval OY ("Naval") business to a Finnish valve manufacturer. The sale included Naval's manufacturing facility located in Laitila, Finland and a service and support center located in St. Petersburg, Russia. The cash proceeds for the sale totaled $46.8 million, net of cash divested, and resulted in a $13.4 million pre-tax gain recorded in selling, general and administrative expense in the condensed consolidated statements of income. Net sales related to the Naval business totaled $8.2 million in the first quarter of 2014.
As discussed in Note 2 to our consolidated financial statements included in our 2013 Annual Report, effective December 10, 2013, we acquired for inclusion in Industrial Product Division ("IPD"), 100% of Innovative Mag-Drive, LLC ("Innomag"), a privately-owned, U.S.-based company specializing in advanced sealless magnetic drive centrifugal pumps for the chemical and general industries, in an asset purchase up to $78.7 million in cash. Of the total purchase price, $66.7 million was paid at closing and $0.8 million represented a subsequent working capital adjustment. The remaining $11.2 million of the total purchase price is contingent upon Innomag achieving certain performance metrics during the two- and five-year periods following the acquisition, and to the extent achieved, is expected to be paid in cash within four months of the performance measurement dates. We initially recorded a liability of $7.5 million as an estimate of the acquisition date fair value of the contingent consideration, which is based on the weighted probability of achievement of the performance metrics as of the date of the acquisition. No pro forma financial information has been presented due to immateriality.
As discussed in Note 2 to our consolidated financial statements included in our 2013 Annual Report, 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, 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.
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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 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, 5,062,095 were available for issuance as of March 31, 2014. We also maintain the Flowserve Corporation 2004 Stock Compensation Plan, which 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 which 827,835 were available for issuance as of March 31, 2014. 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 $53.3 million and $31.5 million at March 31, 2014 and December 31, 2013, 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, 2014 and 2013 was $32.9 million and $33.2 million, respectively.
We recorded stock-based compensation expense of $6.5 million ($9.9 million pre-tax) and $5.3 million ($8.0 million pre-tax) for the three months ended March 31, 2014 and 2013, respectively.
The following table summarizes information regarding Restricted Shares:
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| | | | | | |
| Three Months Ended March 31, 2014 |
| Shares | | Weighted Average Grant-Date Fair Value |
Number of unvested shares: | | | |
Outstanding - January 1, 2014 | 2,020,678 |
| | $ | 44.68 |
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Granted | 464,804 |
| | 72.21 |
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Vested | (749,024 | ) | | 43.97 |
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Canceled | (50,028 | ) | | 49.19 |
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Outstanding - March 31, 2014 | 1,686,430 |
| | $ | 52.44 |
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Unvested Restricted Shares outstanding as of March 31, 2014, includes approximately 838,000 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 expense is adjusted based on changes in the expected achievement of the performance targets. Vesting provisions range from 0 to approximately 1,675,000 shares based on performance targets. As of March 31, 2014, we estimate vesting of approximately 1,029,000 shares based on expected achievement of performance targets.
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4. | 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 6 to our consolidated financial statements included in our 2013 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. All forward hedging instruments are highly effective.
Forward exchange contracts designated as hedging instruments had a notional value of $21.3 million and $6.2 million, at March 31, 2014 and December 31, 2013, respectively. The fair values of assets and liabilities and any changes in those fair values related to designated forward exchange contracts are immaterial for the periods presented below. Forward exchange contracts with third parties not designated as hedging instruments had a notional value of $648.9 million and $610.7 million, at March 31, 2014 and December 31, 2013, respectively. At March 31, 2014, the length of forward exchange contracts currently in place ranged from one day to 24 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 March 31, 2014 and December 31, 2013, we had $90.0 million and $140.0 million, respectively, of notional amount in outstanding interest rate swaps with third parties. All interest rate swaps are highly effective. At March 31, 2014, the maximum remaining length of any interest rate swap contract in place was approximately 15 months.
We are exposed to risk from credit-related losses resulting from nonperformance by counterparties to our financial instruments. We perform credit evaluations of our counterparties under forward exchange contracts and interest rate swap agreements and expect all counterparties to meet their obligations. We have not experienced credit losses from our counterparties.
The fair value of forward exchange derivative contracts not designated as hedging instruments are summarized below:
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| | | | | | | |
| March 31, | | December 31, |
(Amounts in thousands) | 2014 | | 2013 |
Current derivative assets | $ | 6,181 |
| | $ | 5,215 |
|
Noncurrent derivative assets | 215 |
| | 729 |
|
Current derivative liabilities | 658 |
| | 2,207 |
|
Noncurrent derivative liabilities | — |
| | 113 |
|
The fair value of interest rate swaps and forward exchange derivative contracts designated as hedging instruments are summarized below:
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| | | | | | | |
| March 31, | | December 31, |
(Amounts in thousands) | 2014 | | 2013 |
Current derivative assets | $ | 96 |
| | $ | 146 |
|
Current derivative liabilities | 276 |
| | 409 |
|
Noncurrent derivative liabilities | 10 |
| | 37 |
|
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 are summarized below:
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| | | | | | | |
| Three Months Ended March 31, |
(Amounts in thousands) | 2014 | | 2013 |
Gain (loss) recognized in income | $ | 1,544 |
| | $ | (2,997 | ) |
Gains and losses recognized in our condensed consolidated statements of income for forward exchange contracts are classified as other expense, net.
The impact of net changes in the fair values of interest rate swaps in cash flow hedging relationships are summarized in Note 15.
Debt, including capital lease obligations, consisted of:
|
| | | | | | | |
| March 31, | | December 31, |
(Amounts in thousands, except percentages) | 2014 | | 2013 |
4.00% Senior Notes due November 15, 2023, net of unamortized discount | $ | 298,644 |
| | $ | 298,615 |
|
3.50% Senior Notes due September 15, 2022 net of unamortized discount | 498,331 |
| | 498,289 |
|
Term Loan Facility, interest rate of 1.48% at March 31, 2014 and 1.50% at December 31, 2013 | 360,000 |
| | 370,000 |
|
Capital lease obligations and other borrowings | 35,357 |
| | 33,393 |
|
Debt and capital lease obligations | 1,192,332 |
| | 1,200,297 |
|
Less amounts due within one year | 75,088 |
| | 72,678 |
|
Total debt due after one year | $ | 1,117,244 |
| | $ | 1,127,619 |
|
Senior Notes
As discussed in Note 10 to our consolidated financial statements included in our 2013 Annual Report, on November 1, 2013 we completed the public offering of $300.0 million in aggregate principal amount of senior notes due November 15, 2023 ("2023 Senior Notes"). On September 11, 2012, we completed the public offering of $500.0 million in aggregate principal amount of senior notes due September 15, 2022 ("2022 Senior Notes").
Senior Credit Facility
As discussed in Note 10 to our consolidated financial statements included in our 2013 Annual Report, 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”) with a maturity date of October 4, 2018. As of March 31, 2014 and December 31, 2013, we had no amounts outstanding under the Revolving Credit Facility. We had outstanding letters of credit of $95.9 million and $106.1 million at March 31, 2014 and December 31, 2013, respectively, which reduced our borrowing capacity to $904.1 million and $893.9 million, respectively. 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 March 31, 2014. Our compliance with applicable financial covenants under the Senior Credit Facility is tested quarterly, and we complied with all covenants at March 31, 2014.
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 March 31, 2014. During the three months ended March 31, 2014, we made scheduled repayments of $10.0 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 $90.0 million of notional amount of interest rate swaps at March 31, 2014 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"), which expired in October 2013; however, the existing letters of credit remain outstanding and are still bound by the facility's covenants. We were in compliance with all covenants under our European LOC Facility as of March 31, 2014.
We had outstanding letters of credit drawn on the European LOC Facility of €18.3 million ($25.2 million) and €69.6 million ($95.4 million) as of March 31, 2014 and December 31, 2013, respectively.
| |
6. | Supplemental Guarantor Financial Information |
On September 11, 2012 and November 1, 2013, we completed public offerings 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 March 31, 2014 |
| Parent (Issuer) | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated Total |
(Amounts in thousands) | | | | | | | | | |
Sales | $ | — |
| | $ | 442,507 |
| | $ | 702,072 |
| | $ | (76,443 | ) | | $ | 1,068,136 |
|
Cost of sales | — |
| | (282,213 | ) | | (485,244 | ) | | 76,443 |
| | (691,014 | ) |
Gross profit | — |
| | 160,294 |
| | 216,828 |
| | — |
| | 377,122 |
|
Selling, general and administrative expense | (449 | ) | | (51,172 | ) | | (164,606 | ) | | — |
| | (216,227 | ) |
Net earnings from affiliates | — |
| | 388 |
| | 3,043 |
| | — |
| | 3,431 |
|
Net earnings from consolidated subsidiaries, net of tax | 114,460 |
| | 39,181 |
| | — |
| | (153,641 | ) | | — |
|
Operating income | 114,011 |
| | 148,691 |
| | 55,265 |
| | (153,641 | ) | | 164,326 |
|
Interest expense, net | (9,134 | ) | | (2,679 | ) | | (3,005 | ) | | — |
| | (14,818 | ) |
Other expense, net | — |
| | (1,863 | ) | | (1,042 | ) | | — |
| | (2,905 | ) |
Earnings before income taxes | 104,877 |
| | 144,149 |
| | 51,218 |
| | (153,641 | ) | | 146,603 |
|
Provision for income taxes | 2,857 |
| | (29,689 | ) | | (11,183 | ) | | — |
| | (38,015 | ) |
Net earnings, including noncontrolling interests | 107,734 |
| | 114,460 |
| | 40,035 |
| | (153,641 | ) | | 108,588 |
|
Less: Net earnings attributable to noncontrolling interests | — |
| | — |
| | (854 | ) | | — |
| | (854 | ) |
Net earnings attributable to Flowserve Corporation | $ | 107,734 |
| | $ | 114,460 |
| | $ | 39,181 |
| | $ | (153,641 | ) | | $ | 107,734 |
|
Comprehensive income attributable to Flowserve Corporation | $ | 113,456 |
| | $ | 120,054 |
| | $ | 46,329 |
| | $ | (166,383 | ) | | $ | 113,456 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2013 |
| Parent (Issuer) | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated Total |
(Amounts in thousands) | | | | | | | | | |
Sales | $ | — |
| | $ | 447,577 |
| | $ | 731,386 |
| | $ | (82,367 | ) | | $ | 1,096,596 |
|
Cost of sales | — |
| | (288,964 | ) | | (516,691 | ) | | 82,367 |
| | (723,288 | ) |
Gross profit | — |
| | 158,613 |
| | 214,695 |
| | — |
| | 373,308 |
|
Selling, general and administrative expense | (338 | ) | | (92,788 | ) | | (141,383 | ) | | — |
| | (234,509 | ) |
Net earnings from affiliates | — |
| | 225 |
| | 31,455 |
| | — |
| | 31,680 |
|
Net earnings from consolidated subsidiaries, net of tax | 102,555 |
| | 60,274 |
| | — |
| | (162,829 | ) | | — |
|
Operating income | 102,217 |
| | 126,324 |
| | 104,767 |
| | (162,829 | ) | | 170,479 |
|
Interest expense, net | (6,500 | ) | | (2,780 | ) | | (2,538 | ) | | — |
| | (11,818 | ) |
Other expense, net | — |
| | (1,673 | ) | | (9,355 | ) | | — |
| | (11,028 | ) |
Earnings before income taxes | 95,717 |
| | 121,871 |
| | 92,874 |
| | (162,829 | ) | | 147,633 |
|
Provision for income taxes | 2,072 |
| | (19,316 | ) | | (31,489 | ) | | — |
| | (48,733 | ) |
Net earnings, including noncontrolling interests | 97,789 |
| | 102,555 |
| | 61,385 |
| | (162,829 | ) | | 98,900 |
|
Less: Net earnings attributable to noncontrolling interests | — |
| | — |
| | (1,111 | ) | | — |
| | (1,111 | ) |
Net earnings attributable to Flowserve Corporation | $ | 97,789 |
| | $ | 102,555 |
| | $ | 60,274 |
| | $ | (162,829 | ) | | $ | 97,789 |
|
Comprehensive income attributable to Flowserve Corporation | $ | 66,868 |
| | $ | 71,077 |
| | $ | 26,916 |
| | $ | (97,993 | ) | | $ | 66,868 |
|
FLOWSERVE CORPORATION
CONDENSED CONSOLIDATING BALANCE SHEETS
|
| | | | | | | | | | | | | | | | | | | |
| March 31, 2014 |
| Parent (Issuer) | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated Total |
(Amounts in thousands) | | | | | | | | | |
ASSETS |
Current assets: | | | | | | | | | |
Cash and cash equivalents | $ | 2,407 |
| | $ | — |
| | $ | 162,009 |
| | $ | — |
| | $ | 164,416 |
|
Accounts receivable, net | — |
| | 261,909 |
| | 802,307 |
| | — |
| | 1,064,216 |
|
Intercompany receivables | 2,090 |
| | 148,543 |
| | 361,577 |
| | (512,210 | ) | | — |
|
Inventories, net | — |
| | 392,799 |
| | 728,449 |
| | — |
| | 1,121,248 |
|
Other current assets, net | 664 |
| | 131,257 |
| | 125,466 |
| | — |
| | 257,387 |
|
Total current assets | 5,161 |
| | 934,508 |
| | 2,179,808 |
| | (512,210 | ) | | 2,607,267 |
|
Property, plant and equipment, net | — |
| | 220,484 |
| | 474,437 |
| | — |
| | 694,921 |
|
Goodwill | — |
| | 709,240 |
| | 392,194 |
| | — |
| | 1,101,434 |
|
Intercompany receivables | 432,500 |
| | 11,384 |
| | 20,321 |
| | (464,205 | ) | | — |
|
Investment in consolidated subsidiaries | 2,579,769 |
| | 1,899,135 |
| | — |
| | (4,478,904 | ) | | — |
|
Other assets, net | 14,505 |
| | 197,569 |
| | 143,712 |
| | — |
| | 355,786 |
|
Total assets | $ | 3,031,935 |
| | $ | 3,972,320 |
| | $ | 3,210,472 |
| | $ | (5,455,319 | ) | | $ | 4,759,408 |
|
| | | | | | | | | |
LIABILITIES AND EQUITY |
Current liabilities: | | | | | | | | | |
Accounts payable | $ | — |
| | $ | 129,738 |
| | $ | 340,484 |
| | $ | — |
| | $ | 470,222 |
|
Intercompany payables | 260 |
| | 363,407 |
| | 148,543 |
| | (512,210 | ) | | — |
|
Accrued liabilities | 11,249 |
| | 239,083 |
| | 506,088 |
| | — |
| | 756,420 |
|
Debt due within one year | 40,000 |
| | — |
| | 35,088 |
| | — |
| | 75,088 |
|
Deferred taxes | — |
| | — |
| | 12,280 |
| | — |
| | 12,280 |
|
Total current liabilities | 51,509 |
| | 732,228 |
| | 1,042,483 |
| | (512,210 | ) | | 1,314,010 |
|
Long-term debt due after one year | 1,116,974 |
| | — |
| | 270 |
| | — |
| | 1,117,244 |
|
Intercompany payables | 1,144 |
| | 451,677 |
| | 11,384 |
| | (464,205 | ) | | — |
|
Retirement obligations and other liabilities | 6,822 |
| | 208,646 |
| | 249,813 |
| | — |
| | 465,281 |
|
Total liabilities | 1,176,449 |
| | 1,392,551 |
| | 1,303,950 |
| | (976,415 | ) | | 2,896,535 |
|
Total Flowserve Corporation shareholders’ equity | 1,855,486 |
| | 2,579,769 |
| | 1,899,135 |
| | (4,478,904 | ) | | 1,855,486 |
|
Noncontrolling interests | — |
| | — |
| | 7,387 |
| | — |
| | 7,387 |
|
Total equity | 1,855,486 |
| | 2,579,769 |
| | 1,906,522 |
| | (4,478,904 | ) | | 1,862,873 |
|
Total liabilities and equity | $ | 3,031,935 |
| | $ | 3,972,320 |
| | $ | 3,210,472 |
| | $ | (5,455,319 | ) | | $ | 4,759,408 |
|
|
| | | | | | | | | | | | | | | | | | | |
| December 31, 2013 |
| Parent (Issuer) | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated Total |
(Amounts in thousands) | | | | | | | | | |
ASSETS |
Current assets: | | | | | | | | | |
Cash and cash equivalents | $ | 29,086 |
| | $ | — |
| | $ | 334,718 |
| | $ | — |
| | $ | 363,804 |
|
Accounts receivable, net | — |
| | 263,594 |
| | 891,733 |
| | — |
| | 1,155,327 |
|
Intercompany receivables | — |
| | 155,422 |
| | 74,089 |
| | (229,511 | ) | | — |
|
Inventories, net | — |
| | 371,172 |
| | 689,498 |
| | — |
| | 1,060,670 |
|
Other current assets, net | 1,879 |
| | 144,551 |
| | 121,151 |
| | — |
| | 267,581 |
|
Total current assets | 30,965 |
| | 934,739 |
| | 2,111,189 |
| | (229,511 | ) | | 2,847,382 |
|
Property, plant and equipment, net | — |
| | 220,072 |
| | 496,217 |
| | — |
| | 716,289 |
|
Goodwill | — |
| | 715,722 |
| | 391,829 |
| | — |
| | 1,107,551 |
|
Intercompany receivables | 432,500 |
| | 9,520 |
| | 186,789 |
| | (628,809 | ) | | — |
|
Investment in consolidated subsidiaries | 2,579,701 |
| | 1,850,998 |
| | — |
| | (4,430,699 | ) | | — |
|
Other assets, net | 15,486 |
| | 211,755 |
| | 138,270 |
| | — |
| | 365,511 |
|
Total assets | $ | 3,058,652 |
| | $ | 3,942,806 |
| | $ | 3,324,294 |
| | $ | (5,289,019 | ) | | $ | 5,036,733 |
|
| | | | | | | | | |
LIABILITIES AND EQUITY |
Current liabilities: | | | | | | | | | |
Accounts payable | $ | — |
| | $ | 163,254 |
| | $ | 448,838 |
| | $ | — |
| | $ | 612,092 |
|
Intercompany payables | 81 |
| | 74,008 |
| | 155,422 |
| | (229,511 | ) | | — |
|
Accrued liabilities | 12,874 |
| | 293,012 |
| | 555,124 |
| | — |
| | 861,010 |
|
Debt due within one year | 40,000 |
| | 5 |
| | 32,673 |
| | — |
| | 72,678 |
|
Deferred taxes | — |
| | — |
| | 12,319 |
| | — |
| | 12,319 |
|
Total current liabilities | 52,955 |
| | 530,279 |
| | 1,204,376 |
| | (229,511 | ) | | 1,558,099 |
|
Long-term debt due after one year | 1,126,904 |
| | — |
| | 715 |
| | — |
| | 1,127,619 |
|
Intercompany payables | 1,144 |
| | 618,145 |
| | 9,520 |
| | (628,809 | ) | | — |
|
Retirement obligations and other liabilities | 7,270 |
| | 214,681 |
| | 251,943 |
| | — |
| | 473,894 |
|
Total liabilities | 1,188,273 |
| | 1,363,105 |
| | 1,466,554 |
| | (858,320 | ) | | 3,159,612 |
|
Total Flowserve Corporation shareholders’ equity | 1,870,379 |
| | 2,579,701 |
| | 1,850,998 |
| | (4,430,699 | ) | | 1,870,379 |
|
Noncontrolling interests | — |
| | — |
| | 6,742 |
| | — |
| | 6,742 |
|
Total equity | 1,870,379 |
| | 2,579,701 |
| | 1,857,740 |
| | (4,430,699 | ) | | 1,877,121 |
|
Total liabilities and equity | $ | 3,058,652 |
| | $ | 3,942,806 |
| | $ | 3,324,294 |
| | $ | (5,289,019 | ) | | $ | 5,036,733 |
|
FLOWSERVE CORPORATION
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
|
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2014 |
| Parent (Issuer) | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated Total |
(Amounts in thousands) | | | | | | | | | |
Net cash flows provided (used) by operating activities | $ | 112,313 |
| | $ | (11,060 | ) | | $ | (59,182 | ) | | $ | (126,736 | ) | | $ | (84,665 | ) |
Cash flows — Investing activities: | | | | | | | | | |
|
Capital expenditures | — |
| | (12,655 | ) | | (19,008 | ) | | — |
| | (31,663 | ) |
Proceeds from sale of business, net of cash divested | — |
| | — |
| | 46,805 |
| | — |
| | 46,805 |
|
Intercompany loan proceeds | — |
| | — |
| | 166,468 |
| | (166,468 | ) | | — |
|
Intercompany loan payments | — |
| | (1,865 | ) | | (306,634 | ) | | 308,499 |
| | — |
|
Proceeds from disposition of assets | — |
| | 26 |
| | 275 |
| | — |
| | 301 |
|
Net cash flows (used) provided by investing activities | — |
| | (14,494 | ) | | (112,094 | ) | | 142,031 |
| | 15,443 |
|
Cash flows — Financing activities: | | | | | | | | | |
Excess tax benefits from stock-based payment arrangements | — |
| | 6,425 |
| | 1,928 |
| | — |
| | 8,353 |
|
Payments on long-term debt | (10,000 | ) | | — |
| | — |
| | — |
| | (10,000 | ) |
(Payments) borrowings under other financing arrangements, net | — |
| | (5 | ) | | 1,814 |
| | — |
| | 1,809 |
|
Repurchases of common shares | (109,605 | ) | | — |
| | — |
| | — |
| | (109,605 | ) |
Payments of dividends | (19,387 | ) | | — |
| | — |
| | — |
| | (19,387 | ) |
Intercompany loan proceeds | — |
| | 306,634 |
| | 1,865 |
| | (308,499 | ) | | — |
|
Intercompany loan payments | — |
| | (166,468 | ) | | — |
| | 166,468 |
| | — |
|
Intercompany dividends | — |
| | (121,032 | ) | | (5,704 | ) | | 126,736 |
| | — |
|
All other financing, net | — |
| | — |
| | (385 | ) | | — |
| | (385 | ) |
Net cash flows (used) provided by financing activities | (138,992 | ) | | 25,554 |
| | (482 | ) | | (15,295 | ) | | (129,215 | ) |
Effect of exchange rate changes on cash | — |
| | — |
| | (951 | ) | | — |
| | (951 | ) |
Net change in cash and cash equivalents | (26,679 | ) | | — |
| | (172,709 | ) | | — |
| | (199,388 | ) |
Cash and cash equivalents at beginning of period | 29,086 |
| | — |
| | 334,718 |
| | — |
| | 363,804 |
|
Cash and cash equivalents at end of period | $ | 2,407 |
| | $ | — |
| | $ | 162,009 |
| | $ | — |
| | $ | 164,416 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2013 |
| Parent (Issuer) | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated Total |
(Amounts in thousands) | | | | | | | | | |
Net cash flows provided (used) by operating activities | $ | 26,554 |
| | $ | (42,173 | ) | | $ | (58,918 | ) | | $ | (33,533 | ) | | $ | (108,070 | ) |
Cash flows — Investing activities: | | | | | | | | | |
|
Capital expenditures | — |
| | (8,783 | ) | | (25,475 | ) | | — |
| | (34,258 | ) |
Payments for acquisition, net of cash acquired | — |
| | — |
| | (10,143 | ) | | — |
| | (10,143 | ) |
Intercompany loan proceeds | — |
| | 901 |
| | — |
| | (901 | ) | | — |
|
Intercompany loan payments | — |
| | — |
| | (76,759 | ) | | 76,759 |
| | — |
|
Proceeds from disposition of assets | — |
| | 25 |
| | 187 |
| | — |
| | 212 |
|
Proceeds from equity investment in affiliates | — |
| | — |
| | 46,240 |
| | — |
| | 46,240 |
|
Net cash flows (used) provided by investing activities | — |
| | (7,857 | ) | | (65,950 | ) | | 75,858 |
| | 2,051 |
|
Cash flows — Financing activities: | | | | | | | | | |
Excess tax benefits from stock-based payment arrangements | — |
| | 5,038 |
| | 1,780 |
| | — |
| | 6,818 |
|
Payments on long-term debt | (5,000 | ) | | — |
| | — |
| | — |
| | (5,000 | ) |
Proceeds from short-term financing | 150,000 |
| | — |
| | — |
| | — |
| | 150,000 |
|
Payments under other financing arrangements | — |
| | (5 | ) | | (4,008 | ) | | — |
| | (4,013 | ) |
Repurchases of common shares | (155,552 | ) | | — |
| | — |
| | — |
| | (155,552 | ) |
Payments of dividends | (17,514 | ) | | — |
| | — |
| | — |
| | (17,514 | ) |
Intercompany loan proceeds | — |
| | 76,759 |
| | — |
| | (76,759 | ) | | — |
|
Intercompany loan payments | — |
| | — |
| | (901 | ) | | 901 |
| | — |
|
Intercompany dividends | — |
| | (31,762 | ) | | (1,771 | ) | | 33,533 |
| | — |
|
All other financing, net | 47 |
| | — |
| | (168 | ) | | — |
| | (121 | ) |
Net cash flows (used) provided by financing activities | (28,019 | ) | | 50,030 |
| | (5,068 | ) | | (42,325 | ) | | (25,382 | ) |
Effect of exchange rate changes on cash | — |
| | — |
| | (3,414 | ) | | — |
| | (3,414 | ) |
Net change in cash and cash equivalents | (1,465 | ) | | — |
| | (133,350 | ) | | — |
| | (134,815 | ) |
Cash and cash equivalents at beginning of period | 2,609 |
| | — |
| | 301,643 |
| | — |
| | 304,252 |
|
Cash and cash equivalents at end of period | $ | 1,144 |
| | $ | — |
| | $ | 168,293 |
| | $ | — |
| | $ | 169,437 |
|
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 4.
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 5. The estimated fair value of our Senior Notes at March 31, 2014 was $796.7 million compared to the carrying value of 797.0 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, 2014 and December 31, 2013.
Inventories, net consisted of the following:
|
| | | | | | | |
| March 31, | | December 31, |
(Amounts in thousands) | 2014 | | 2013 |
Raw materials | $ | 371,481 |
| | $ | 356,899 |
|
Work in process | 863,478 |
| | 786,664 |
|
Finished goods | 304,111 |
| | 306,765 |
|
Less: Progress billings | (332,701 | ) | | (304,395 | ) |
Less: Excess and obsolete reserve | (85,121 | ) | | (85,263 | ) |
Inventories, net | $ | 1,121,248 |
| | $ | 1,060,670 |
|
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) | 2014 | | 2013 |
Net earnings of Flowserve Corporation | $ | 107,734 |
| | $ | 97,789 |
|
Dividends on restricted shares not expected to vest | 3 |
| | 3 |
|
Earnings attributable to common and participating shareholders | $ | 107,737 |
| | $ | 97,792 |
|
Weighted average shares: | | | |
Common stock | 137,123 |
| | 143,710 |
|
Participating securities | 611 |
| | 759 |
|
Denominator for basic earnings per common share | 137,734 |
| | 144,469 |
|
Effect of potentially dilutive securities | 1,136 |
| | 1,162 |
|
Denominator for diluted earnings per common share | 138,870 |
| | 145,631 |
|
Earnings per common share: | | | |
Basic | $ | 0.78 |
| | $ | 0.68 |
|
Diluted | 0.78 |
| | 0.67 |
|
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.
For the three months ended both March 31, 2014 and 2013, no options to purchase common stock were excluded from the computation of potentially dilutive securities.
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10. | Legal Matters and Contingencies |
Asbestos-Related Claims
We are a defendant in a substantial number of lawsuits that seek to recover damages for personal injury allegedly caused by exposure to asbestos-containing products manufactured and/or distributed by our heritage companies in the past. While the overall number of asbestos-related claims has generally declined in recent years, there can be no assurance that this trend will continue, or that the average cost per claim will not further increase. Asbestos-containing materials incorporated into any such products were primarily encapsulated and used as internal components of process equipment, and we do not believe that any significant emission of asbestos fibers occurred during the use of this equipment.
Our practice is to vigorously contest and resolve these claims, and we have been successful in resolving a majority of claims with little or no payment. Historically, a high percentage of resolved claims have been covered by applicable insurance or indemnities from other companies, and we believe that a substantial majority of existing claims should continue to be covered by insurance or indemnities. Accordingly, we have recorded a liability for our estimate of the most likely settlement of asserted claims and a related receivable from insurers or other companies for our estimated recovery, to the extent we believe that the amounts of recovery are probable and not otherwise in dispute. While unfavorable rulings, judgments or settlement terms regarding
these claims could have a material adverse impact on our business, financial condition, results of operations and cash flows, we currently believe the likelihood is remote. Additionally, we have claims pending against certain insurers that, if resolved more favorably than reflected in the recorded receivables, would result in discrete gains in the applicable quarter. We are currently unable to estimate the impact, if any, of unasserted asbestos-related claims, although future claims would also be subject to then existing indemnities and insurance coverage.
United Nations Oil-for-Food Program
In mid-2006, French authorities began an investigation of over 170 French companies, of which one of our French subsidiaries was included, concerning suspected inappropriate activities conducted in connection with the United Nations Oil for Food Program. As previously disclosed, the French investigation of our French subsidiary was formally opened in the first quarter of 2010, and our French subsidiary filed a formal response with the French Court. In July 2012, the French Court ruled against our procedural motions to challenge the constitutionality of the charges and quash the indictment. While the French Court ruling is currently proceeding through a formal review process, we currently do not expect to incur additional case resolution costs of a material amount in this matter. However, if the French authorities take enforcement action against our French subsidiary regarding its investigation, we may be subject to monetary and non-monetary penalties, which we currently do not believe will have a material adverse financial impact on our company.
In addition to the governmental investigation referenced above, on June 27, 2008, the Republic of Iraq filed a civil suit in federal court in New York against 93 participants in the United Nations Oil-for-Food Program, including us and our two foreign subsidiaries that participated in the program. On February 6, 2013 the U.S. District Court for the Southern District of New York issued a ruling that dismissed the suit with prejudice. The plaintiff appealed the dismissal, and that appeal remains pending. We will continue to vigorously contest the suit, and we believe that we have valid defenses to the claims asserted. We do not currently believe the resolution of this suit will have a material adverse financial impact on our company.
Other
We are currently involved as a potentially responsible party at five former public waste disposal sites in various stages of evaluation or remediation. The projected cost of remediation at these sites, as well as our alleged "fair share" allocation, will remain uncertain until all studies have been completed and the parties have either negotiated an amicable resolution or the matter has been judicially resolved. At each site, there are many other parties who have similarly been identified. Many of the other parties identified are financially strong and solvent companies that appear able to pay their share of the remediation costs. Based on our information about the waste disposal practices at these sites and the environmental regulatory process in general, we believe that it is likely that ultimate remediation liability costs for each site will be apportioned among all liable parties, including site owners and waste transporters, according to the volumes and/or toxicity of the wastes shown to have been disposed of at the sites. We believe that our financial exposure for existing disposal sites will not be materially in excess of accrued reserves.
We are also a defendant in a number of other lawsuits, including product liability claims, that are insured, subject to the applicable deductibles, arising in the ordinary course of business, and we are also involved in other uninsured routine litigation, including contract disputes, 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 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.
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11. | Retirement and Postretirement Benefits |
Components of the net periodic cost for retirement and postretirement benefits for the three months ended March 31, 2014 and 2013 were as follows:
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| | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Defined Benefit Plans | | Non-U.S. Defined Benefit Plans | | Postretirement Medical Benefits |
(Amounts in millions) | 2014 | | 2013 | | 2014 | | 2013 | | 2014 | | 2013 |
Service cost | $ | 5.7 |
| | $ | 6.1 |
| | $ | 1.7 |
| | $ | 1.7 |
| | $ | — |
| | $ | — |
|
Interest cost | 4.4 |
| | 3.8 |
| | 3.7 |
| | 3.4 |
| | 0.3 |
| | 0.3 |
|
Expected return on plan assets | (5.5 | ) | | (5.1 | ) | | (2.7 | ) | | (2.4 | ) | | — |
| | — |
|
Amortization of prior service benefit | 0.1 |
| | — |
| | 0.1 |
| | — |
| | — |
| | — |
|
Amortization of unrecognized net loss (gain) | 2.0 |
| | 3.5 |
| | 1.7 |
| | 1.7 |
| | (0.4 | ) | | (0.3 | ) |
Net periodic cost (benefit) recognized | $ | 6.7 |
| | $ | 8.3 |
| | $ | 4.5 |
| | $ | 4.4 |
| | $ | (0.1 | ) | | $ | — |
|
Dividends – On February 17, 2014, our Board of Directors authorized an increase in the payment of quarterly dividends on our common stock from $0.14 per share to $0.16 per share payable quarterly beginning on April 11, 2014. On February 19, 2013, our Board of Directors authorized an increase in the payment of quarterly dividends on our common stock from $0.12 per share to $0.14 per share, payable quarterly beginning on April 12, 2013. Generally, our dividend date-of-record is in the last month of the quarter, and the dividend is paid the following month. Any subsequent dividends will be reviewed by our Board of Directors and declared in its discretion dependent on its assessment of our financial situation and business outlook at the applicable time.
Share Repurchase Program – On February 19, 2013, our Board of Directors approved a $750.0 million share repurchase authorization, which included approximately $193 million of remaining capacity under the prior $1.0 billion share repurchase authorization. Our share repurchase program does not have an expiration date, and we reserve the right to limit or terminate the repurchase program at any time without notice.
We repurchased 1,436,423 shares of our outstanding common stock for $109.6 million, and 2,977,104 shares for $155.6 million, during the three months ended March 31, 2014 and 2013, respectively. As of March 31, 2014, we have $274.8 million of remaining capacity under our current share repurchase program.
For the three months ended March 31, 2014, we earned $146.6 million before taxes and provided for income taxes of $38.0 million, resulting in an effective tax rate of 25.9%. The effective tax rate varied from the U.S. federal statutory rate for the three months ended March 31, 2014 primarily due to the net impact of foreign operations and the lapse of the statute of limitations in certain jurisdictions.
For the three months ended March 31, 2013, we earned $147.6 million before taxes and provided for income taxes of $48.7 million, resulting in an effective tax rate of 33.0%. The effective tax rate varied from the U.S. federal statutory rate for the three months ended March 31, 2013 primarily due to the net impact of foreign operations, partially offset by taxes incurred on the exit of our equity investment in the AIL joint venture discussed in Note 2.
As of March 31, 2014, the amount of unrecognized tax benefits increased by $0.2 million from December 31, 2013. With limited exception, we are no longer subject to U.S. federal income tax audits for years through 2012, state and local income tax audits for years through 2009 or non-U.S. income tax audits for years through 2007. We are currently under examination for various years in Austria, France, Germany, India, Italy, Singapore, 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 $12.2 million within the next 12 months.
The following is a summary of the financial information of the reportable segments reconciled to the amounts reported in the condensed consolidated financial statements:
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| | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended March 31, 2014 | | | | | | | | | | |
(Amounts in thousands) | Engineered Product Division | | Industrial Product Division | | Flow Control Division | | Subtotal–Reportable Segments | | Eliminations and All Other | | Consolidated Total |
Sales to external customers | $ | 489,297 |
| | $ | 197,007 |
| | $ | 381,832 |
| | $ | 1,068,136 |
| | $ | — |
| | $ | 1,068,136 |
|
Intersegment sales | 15,928 |
| | 14,816 |
| | 1,107 |
| | 31,851 |
| | (31,851 | ) | | — |
|
Segment operating income | 79,325 |
| | 23,318 |
| | 83,134 |
| | 185,777 |
| | (21,451 | ) | | 164,326 |
|
| | | | | | | | | | | |
Three Months Ended March 31, 2013 | | | | | | | | | | |
(Amounts in thousands) | Engineered Product Division | | Industrial Product Division | | Flow Control Division | | Subtotal–Reportable Segments | | Eliminations and All Other | | Consolidated Total |
Sales to external customers | $ | 523,775 |
| | $ | 190,946 |
| | $ | 381,875 |
| | $ | 1,096,596 |
| | $ | — |
| | $ | 1,096,596 |
|
Intersegment sales | 15,916 |
| | 20,354 |
| | 2,154 |
| | 38,424 |
| | (38,424 | ) | | — |
|
Segment operating income | 84,603 |
| | 21,354 |
| | 87,169 |
| | 193,126 |
| | (22,647 | ) | | 170,479 |
|
15. Accumulated Other Comprehensive Loss
The following table presents the changes in accumulated other comprehensive loss ("AOCL"), net of tax:
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| 2014 | | 2013 |
(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 | $ | (89,953 | ) | | $ | (129,528 | ) | | $ | (814 | ) | | $ | (220,295 | ) | | $ | (61,083 | ) | | $ | (161,757 | ) | | $ | (254 | ) | | $ | (223,094 | ) |
Other comprehensive income (loss) before reclassifications | (2,509 | ) | | 298 |
| | 24 |
| | (2,187 | ) | | (38,878 | ) | | 3,480 |
| | (29 | ) | | (35,427 | ) |
Amounts reclassified from AOCL | 5,460 |
| | 2,481 |
| | 144 |
| | 8,085 |
| | 1,217 |
| | 3,252 |
| | 270 |
| | 4,739 |
|
Net current-period other comprehensive income (loss) | 2,951 |
| | 2,779 |
| | 168 |
| | 5,898 |
| | (37,661 | ) | | 6,732 |
| | 241 |
| | (30,688 | ) |
Balance - March 31 | $ | (87,002 | ) | | $ | (126,749 | ) | | $ | (646 | ) | | $ | (214,397 | ) | | $ | (98,744 | ) | | $ | (155,025 | ) | | $ | (13 | ) | | $ | (253,782 | ) |
_______________________________________
(1) Includes foreign currency translation adjustments attributable to noncontrolling interests of $1.2 million at January 1, 2014 and 2013 and $1.4 million at March 31, 2014 and 2013. Amounts in parentheses indicate debits.
The following table presents the reclassifications out of AOCL:
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| | | | | | | | | | |
| | | | Three Months Ended March 31, |
(Amounts in thousands) | | Affected line item in the statement of income | | 2014(1) | | 2013(1) |
Foreign currency translation items | | | | | | |
Release of cumulative translation adjustments upon sale of equity method investment | | Net earnings from affiliates | | $ | — |
| | $ | (1,217 | ) |
Release of cumulative translation adjustments due to sale of business | | Selling, general and administrative expense | | (5,460 | ) | | — |
|
| | Tax benefit | | — |
| | — |
|
| | Net of tax | | $ | (5,460 | ) | | $ | (1,217 | ) |
| | | | | | |
Cash flow hedging activity | | | | | | |