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10-Q
FLOWSERVE CORP filed this Form 10-Q on 07/30/2015
Entire Document
 
FLS 6-30-15 Financial Statements
 
 
 


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

FORM 10-Q
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2015
OR

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

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

 
(972) 443-6500
 
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). þ Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
Accelerated filer ¨
Non-accelerated filer ¨ (do not check if a smaller reporting company)
Smaller reporting company ¨
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes þ No
As of July 22, 2015, there were 133,368,108 shares of the issuer’s common stock outstanding.


 
 
 




FLOWSERVE CORPORATION
FORM 10-Q
TABLE OF CONTENTS

 
Page
 
No.
 
 
 
 
 
 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
 
i



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 June 30,
 
2015
 
2014
Sales
$
1,162,247

 
$
1,224,378

Cost of sales
(793,155
)
 
(794,072
)
Gross profit
369,092

 
430,306

Selling, general and administrative expense
(243,594
)
 
(238,178
)
Net earnings from affiliates
2,079

 
2,187

Operating income
127,577

 
194,315

Interest expense
(15,392
)
 
(15,027
)
Interest income
249

 
507

Other expense, net
(4,882
)
 
(3,836
)
Earnings before income taxes
107,552

 
175,959

Provision for income taxes
(30,920
)
 
(50,794
)
Net earnings, including noncontrolling interests
76,632

 
125,165

Less: Net earnings attributable to noncontrolling interests
(1,624
)
 
(1,652
)
Net earnings attributable to Flowserve Corporation
$
75,008

 
$
123,513

Net earnings per share attributable to Flowserve Corporation common shareholders:
 
 
 
Basic
$
0.56

 
$
0.90

Diluted
0.56

 
0.90

Cash dividends declared per share
$
0.18

 
$
0.16


CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Amounts in thousands)
Three Months Ended June 30,
 
2015
 
2014
Net earnings, including noncontrolling interests
$
76,632

 
$
125,165

Other comprehensive income:
 
 
 
Foreign currency translation adjustments, net of taxes of $(8,161) and $(4,677), respectively
13,666

 
7,782

Pension and other postretirement effects, net of taxes of $(134) and $(819), respectively
1,780

 
1,463

Cash flow hedging activity, net of taxes of $(1,582) and $12, respectively
3,427

 
(65
)
Other comprehensive income
18,873

 
9,180

Comprehensive income, including noncontrolling interests
95,505

 
134,345

Comprehensive loss attributable to noncontrolling interests
(3,059
)
 
(1,651
)
Comprehensive income attributable to Flowserve Corporation
$
92,446

 
$
132,694


See accompanying notes to condensed consolidated financial statements.


1



FLOWSERVE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Amounts in thousands, except per share data)
Six Months Ended June 30,
 
2015
 
2014
Sales
$
2,176,867

 
$
2,292,514

Cost of sales
(1,476,045
)
 
(1,485,086
)
Gross profit
700,822

 
807,428

Selling, general and administrative expense
(483,521
)
 
(454,405
)
Net earnings from affiliates
3,652

 
5,617

Operating income
220,953

 
358,640

Interest expense
(31,429
)
 
(30,176
)
Interest income
1,006

 
838

Other expense, net
(24,828
)
 
(6,741
)
Earnings before income taxes
165,702

 
322,561

Provision for income taxes
(59,426
)
 
(88,809
)
Net earnings, including noncontrolling interests
106,276

 
233,752

Less: Net earnings attributable to noncontrolling interests
(3,602
)
 
(2,505
)
Net earnings attributable to Flowserve Corporation
$
102,674

 
$
231,247

Net earnings per share attributable to Flowserve Corporation common shareholders:
 
 
 
Basic
$
0.76

 
$
1.68

Diluted
0.76

 
1.67

Cash dividends declared per share
$
0.36

 
$
0.32


CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Amounts in thousands)
Six Months Ended June 30,
 
2015
 
2014
Net earnings, including noncontrolling interests
$
106,276

 
$
233,752

Other comprehensive (loss) income:
 
 
 
Foreign currency translation adjustments, net of taxes of $55,400 and $(6,451), respectively
(92,768
)
 
10,733

Pension and other postretirement effects, net of taxes of $(3,525) and $(1,757), respectively
9,671

 
4,242

Cash flow hedging activity, net of taxes of $445 and $(58), respectively
(1,719
)
 
103

Other comprehensive (loss) income
(84,816
)
 
15,078

Comprehensive income, including noncontrolling interests
21,460

 
248,830

Comprehensive loss attributable to noncontrolling interests
(5,056
)
 
(2,682
)
Comprehensive income attributable to Flowserve Corporation
$
16,404

 
$
246,148


See accompanying notes to condensed consolidated financial statements.


2



FLOWSERVE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in thousands, except par value)
June 30,
 
December 31,
 
2015
 
2014
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
315,304

 
$
450,350

Accounts receivable, net of allowance for doubtful accounts of $31,729 and $25,469, respectively
1,042,404

 
1,082,447

Inventories, net
1,129,695

 
995,564

Deferred taxes
153,395

 
158,912

Prepaid expenses and other
138,142

 
106,890

Total current assets
2,778,940

 
2,794,163

Property, plant and equipment, net of accumulated depreciation of $844,655 and $836,981, respectively
767,904

 
693,881

Goodwill
1,236,374

 
1,067,255

Deferred taxes
27,047

 
31,419

Other intangible assets, net
242,671

 
146,337

Other assets, net
259,186

 
234,965

Total assets
$
5,312,122

 
$
4,968,020

 
 
 
 
LIABILITIES AND EQUITY
Current liabilities:
 
 
 
Accounts payable
$
502,969

 
$
611,715

Accrued liabilities
781,812

 
794,072

Debt due within one year
67,365

 
53,131

Deferred taxes
13,272

 
12,957

Total current liabilities
1,365,418

 
1,471,875

Long-term debt due after one year
1,626,150

 
1,101,791

Retirement obligations and other liabilities
536,641

 
452,511

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
478,629

 
495,600

Retained earnings
3,469,687

 
3,415,738

Treasury shares, at cost – 44,200 and 42,444 shares, respectively
(1,945,235
)
 
(1,830,919
)
Deferred compensation obligation
11,180

 
10,558

Accumulated other comprehensive loss
(466,676
)
 
(380,406
)
Total Flowserve Corporation shareholders’ equity
1,768,576

 
1,931,562

Noncontrolling interests
15,337

 
10,281

Total equity
1,783,913

 
1,941,843

Total liabilities and equity
$
5,312,122

 
$
4,968,020


See accompanying notes to condensed consolidated financial statements.

3



FLOWSERVE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
Six Months Ended June 30,
 
2015
 
2014
Cash flows – Operating activities:
 
 
 
Net earnings, including noncontrolling interests
$
106,276

 
$
233,752

Adjustments to reconcile net earnings to net cash used by operating activities:
 
 
 
Depreciation
49,270

 
46,316

Amortization of intangible and other assets
17,833

 
9,327

Gain on sale of business

 
(13,403
)
Excess tax benefits from stock-based payment arrangements
(5,858
)
 
(8,490
)
Stock-based compensation
17,396

 
18,272

Foreign currency and other non-cash adjustments
49,794

 
11,489

Change in assets and liabilities, net of acquisition:
 
 
 
Accounts receivable, net
45,376

 
(14,695
)
Inventories, net
(113,005
)
 
(115,109
)
Prepaid expenses and other
(2,017
)
 
(8,038
)
Other assets, net
(22,435
)
 
(1,692
)
Accounts payable
(124,001
)
 
(85,599
)
Accrued liabilities and income taxes payable
(24,471
)
 
(86,059
)
Retirement obligations and other liabilities
7,003

 
(5
)
       Net deferred taxes
16,903

 
2,667

Net cash flows provided (used) by operating activities
18,064

 
(11,267
)
Cash flows – Investing activities:
 
 
 
Capital expenditures
(113,794
)
 
(53,666
)
Payments for acquisition, net of cash acquired
(341,545
)
 

Proceeds from disposal of assets
1,872

 
789

Proceeds from sale of business, net of cash divested

 
46,805

Net cash flows used by investing activities
(453,467
)
 
(6,072
)
Cash flows – Financing activities:
 
 
 
Excess tax benefits from stock-based payment arrangements
5,858

 
8,490

Payments on long-term debt
(20,000
)
 
(20,000
)
Proceeds from issuance of senior notes
526,332

 

Payments of deferred loan cost
(5,108
)
 

Proceeds under other financing arrangements
2,902

 
13,233

Payments under other financing arrangements
(7,631
)
 
(4,789
)
Repurchases of common shares
(139,644
)
 
(153,068
)
Payments of dividends
(45,928
)
 
(41,382
)
Other
160

 
(2,499
)
Net cash flows provided (used) by financing activities
316,941

 
(200,015
)
Effect of exchange rate changes on cash
(16,584
)
 
(2,881
)
Net change in cash and cash equivalents
(135,046
)
 
(220,235
)
Cash and cash equivalents at beginning of period
450,350

 
363,804

Cash and cash equivalents at end of period
$
315,304

 
$
143,569


See accompanying notes to condensed consolidated financial statements.

4



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 June 30, 2015, the related condensed consolidated statements of income and comprehensive income for the three and six months ended June 30, 2015 and 2014, and the condensed consolidated statements of cash flows for the six months ended June 30, 2015 and 2014, 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 June 30, 2015 ("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, 2014 ("2014 Annual Report").
Venezuela – Our operations in Venezuela primarily consist of a service center that performs service and repair activities. Our Venezuelan subsidiary's sales for the three and six months ended June 30, 2015 represented less than 0.5% of consolidated sales and its assets at June 30, 2015 represented less than 0.5% of total consolidated assets. Assets primarily consisted of United States ("U.S.") dollar-denominated monetary assets and bolivar-denominated non-monetary assets at June 30, 2015. In addition, certain of our operations in other countries sell equipment and parts that are typically denominated in U.S. dollars directly to Venezuelan customers.
We have experienced delays in collecting payment on our accounts receivable from the national oil company in Venezuela, our primary Venezuelan customer. These accounts receivable are primarily U.S. dollar-denominated and are not disputed, and we have not historically had write-offs relating to this customer. Our total outstanding accounts receivable with this customer were approximately 8% of our gross accounts receivable at June 30, 2015. Given the experienced delays in collecting payments we estimate that approximately 58% of the outstanding accounts receivable will most likely not be collected within one year and therefore has been classified as long-term within other assets, net on our June 30, 2015 condensed consolidated balance sheet as compared to 48% at December 31, 2014.
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 June 30, 2015 the SICAD I exchange rate was 12.8 bolivars to the U.S. dollar, compared with the official exchange rate of 6.3 bolivars to the U.S. dollar ("Official"). In addition, during the second quarter of 2014 the Venezuelan government created a third currency exchange mechanism ("SICAD II"). In February 2015, the Venezuelan government created a new currency exchange mechanism, SIMADI, which replaced the SICAD II mechanism. At June 30, 2015, the SIMADI exchange rate was 197 bolivars to the U.S. dollar.
As of March 31, 2015, we determined, based on our specific facts and circumstances, that the SIMADI exchange rate was the most appropriate for the remeasurement of our Venezuelan subsidiary's bolivar-denominated net monetary assets in U.S. dollars. As a result of the remeasurement, in the first quarter of 2015 we recognized a loss of $20.6 million of which $18.5 million was reported in other expense, net and $2.1 million in cost of goods sold in our condensed consolidated statement of income and resulted in no tax benefit.
We are continuing to assess and monitor the ongoing impact of the 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 SIMADI exchange rate, as well as additional government actions, political and labor unrest, or other economic conditions that may adversely impact our future consolidated financial condition or results of operations.
Accounting Policies
Significant accounting policies, for which no significant changes have occurred in the six months ended June 30, 2015, are detailed in Note 1 to our consolidated financial statements included in our 2014 Annual Report.
Accounting Developments
Pronouncements Implemented
In June 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-11 "Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures." This ASU

5



changes the accounting for repurchase-to-maturity transactions and linked repurchase financings so that such transactions will now be accounted for as secured borrowings. This accounting change is effective for the first interim or annual period beginning after December 15, 2014 and early adoption is not permitted. There are also new disclosure requirements in this ASU. Our adoption of ASU No. 2014-11, as of January 1, 2015, did not have an impact on our consolidated financial condition and results of operations.
In May 2015, the FASB issued ASU No. 2015-08, "Business Combinations (Topic 805), Pushdown Accounting - Amendments to SEC Paragraphs Pursuant to Staff Accounting Bulletin No. 115." This ASU amends various U.S. Securities and Exchange Commission ("SEC") paragraphs pursuant to the issuance Staff Accounting Bulletin No. 115. The amendments conforms the Board’s guidance on pushdown accounting to that of the SEC. We adopted the amendments of this ASU immediately and it did not have an impact on our consolidated financial condition and results of operations.
 Pronouncements Not Yet Implemented
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)" which supersedes the revenue recognition requirements in "Revenue Recognition (Topic 605)." The standard is principle-based and provides a five-step model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. There are also expanded disclosure requirements in this ASU. In July 2015 the FASB voted to delay the effective date of ASU 2014-09 by one year. As a result, public entities will apply the new standard for annual reporting periods beginning after December 15, 2017, including interim periods within those reporting periods. Early adoption as of the original public entity effective date is permitted. We are currently evaluating the impact of ASU No. 2014-09 on our consolidated financial condition and results of operations.
In June 2014, the FASB issued ASU No. 2014-12 "Compensation-Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period." This ASU was issued to address share-based payment awards with a performance target affecting vesting that could be achieved after the employee’s requisite service period. This ASU is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. This ASU may be applied either (a) prospectively to all awards granted or modified after the effective date or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. The adoption of ASU No. 2014-12 is not expected to have a material impact on our consolidated financial condition and results of operations.
In August 2014, the FASB issued ASU No. 2014-15, "Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern." This ASU requires management to evaluate whether there are conditions or events that raise substantial doubt about the ability of a company to continue as a going concern for one year from the date the financial statements are issued or within one year after the date that the financial statements are available to be issued when applicable. Further, the ASU provides management guidance regarding its responsibility to disclose the ability of a company to continue as a going concern in the notes to the financial statements. This ASU is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted. The adoption of ASU No. 2014-15 is not expected to have an impact on our consolidated financial condition and results of operations.
In November 2014, the FASB issued ASU 2015-01, “Income Statement-Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items.” In connection with the FASB's efforts to simplify accounting standards, the FASB released new guidance on simplifying Income Statement presentation by eliminating the concept of extraordinary items from U.S. GAAP. With the issuance of this ASU the FASB determined that the elimination of the concept of extraordinary items from U.S. GAAP would reduce the cost and complexity on the application of accounting standards, while maintaining or improving the usefulness of information included in financial statements. The adoption of ASU No. 2015-01 is not expected to have an impact on our consolidated financial condition and results of operations.
In February 2015, the FASB issued ASU No. 2015-02, "Consolidation (Topic 810) - Amendments to the Consolidation Analysis,” which provides guidance on the analysis process companies must perform in order to determine whether a legal entity should be consolidated. The new ASU simplifies U.S. GAAP by eliminating entity specific consolidation guidance for limited partnerships. It also revises other aspects of the consolidation analysis, to include the ownership assessment of variable interest entities (VIEs), fee arrangements and how related parties are assessed. The amendments rescind the indefinite deferral of FASB Statement 167, Amendments to FASB Interpretation No. 46(R), for certain investment funds and replace it with a permanent scope exception for money market funds. ASU 2015-02 is effective for periods beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. We are currently evaluating the impact of ASU No. 2015-02 on our consolidated financial condition and results of operations.
In April 2015, the FASB issued ASU No. 2015-03, "Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.” The ASU was issued in connection with the FASB's efforts to simplify accounting standards for the presentation of debt issuance costs. The amendments of this ASU require companies to present debt issuance costs the

6



same manner that present debt discounts are currently reported, as a direct deduction from the carrying value of that debt liability. The applicability of this requirement does not impact the recognition and measurement guidance for debt issuance costs. ASU 2015-03 is effective for periods beginning after December 15, 2015. Early adoption is allowed for financial statements that have yet to be issued. The adoption of ASU No. 2015-03 is not expected to have a material impact on our consolidated financial condition and results of operations.
In April 2015, the FASB issued ASU No. 2015-05, "Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement." The ASU provides explicit guidance about a customer's accounting for fees paid in connection with a cloud computing arrangements. ASU 2015-05 is effective for periods beginning after December 15, 2015. Early adoption is permitted. The adoption of ASU No. 2015-05 is not expected to have a material impact on our consolidated financial condition and results of operations.
In May 2015, the FASB issued ASU No. 2015-07, "Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) (a consensus of the Emerging Issues Task Force)." The ASU removes the requirement to categorize all investments for which fair value is measured using the net asset value per share practical expedient within the fair value hierarchy. ASU 2015-07 is effective for periods beginning after December 15, 2015. Early adoption is permitted. The adoption of ASU No. 2015-07 is not expected to have an impact on our consolidated financial condition and results of operations.


7



2.
Acquisition and Disposition
SIHI Group B.V.
Effective January 7, 2015, we acquired for inclusion in Industrial Product Division ("IPD"), 100% of SIHI Group B.V. ("SIHI"), a global provider of engineered vacuum and fluid pumps and related services, primarily servicing the chemical market, as well as the pharmaceutical, food & beverage and other process industries, in a stock purchase for €286.7 million ($341.5 million based on exchange rates in effect at the time the acquisition closed and net of cash acquired) in cash. The acquisition was funded using approximately $110 million in available cash and approximately $255 million in initial borrowings from our Revolving Credit Facility, which was subsequently paid down with a portion of the net proceeds from our 2022 EUR Senior Notes discussed in Note 5. SIHI, based in The Netherlands, has operations primarily in Europe and, to a lesser extent, the Americas and Asia.
During the first quarter of 2015, the fair value of assets acquired and liabilities assumed was recorded on a preliminary basis. During the second quarter of 2015, we recorded measurement period adjustments, primarily related to the revision of the estimated fair value of our investment in an unconsolidated joint venture, and other reclassifications that had no net impact on goodwill. These adjustments were made to the preliminary amounts recognized to reflect new information obtained about facts and circumstances that existed as of the acquisition date, that if known, would have affected the measurements of the amounts recognized at that date. The allocation of the purchase price, including the above mentioned measurement period adjustments, is summarized below:
 
January 7, 2015 (As originally reported)
Measurement Period Adjustments
January 7, 2015 (As adjusted)
 
(Amounts in millions)
Accounts receivable
$
56.2

$
3.1

$
59.3

Inventories
74.0


74.0

Prepaid expenses and other
17.2

0.5

17.7

Total current assets
147.4

3.6

151.0

Intangible assets
 




Trademarks
20.9


20.9

Existing customer relationships
45.3


45.3

Backlog
8.5


8.5

Engineering drawings and other
3.9


3.9

Total intangible assets
78.6


78.6

Property, plant and equipment
87.5

7.0

94.5

Long-term deferred tax asset
10.7

1.0

11.7

Investments in affiliates
11.6

(4.3
)
7.3

Total assets
335.8

7.3

343.1

Current liabilities
(87.0
)
(1.0
)
(88.0
)
Noncurrent liabilities
(101.7
)
(13.0
)
(114.7
)
Net assets
147.1

(6.7
)
140.4

Goodwill
194.4

6.7

201.1

Purchase price, net of cash acquired of $23.4 million
$
341.5

$

$
341.5

The excess of the acquisition date fair value of the total purchase price over the estimated fair value of the net assets was recorded as goodwill. Goodwill of $201.1 million represents the value expected to be obtained from strengthening Flowserve’s portfolio of products and services through the addition of SIHI's engineered vacuum and fluid pumps, as well as the associated aftermarket services and parts. The goodwill related to this acquisition is recorded in the IPD segment and is not expected to be deductible for tax purposes. The trademarks are primarily indefinite-lived intangibles. Existing customer relationships, engineering drawings and backlog have expected weighted average useful lives of 10 years, 10 years and less than one year, respectively. In total, amortizable intangible assets have a weighted average useful live of approximately 9 years.

8



Subsequent to January 7, 2015, the revenues and expenses of SIHI have been included in our condensed consolidated statement of income. The SIHI acquisition generated sales of approximately $77.2 million and $144.1 million and decreased net earnings by approximately $13.5 million and $37.9 million for the three and six months ended June 30, 2015, respectively. SIHI's sales (unaudited) were approximately €270 million during its fiscal year ended November 30, 2014. No proforma financial information has been presented due to immateriality.
Naval OY
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.
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, 4,251,797 were available for issuance as of June 30, 2015. The Flowserve Corporation 2004 Stock Compensation Plan expired on June 22, 2014, with 827,835 shares unissued. 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 $44.3 million and $30.6 million at June 30, 2015 and December 31, 2014, 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 June 30, 2015 and 2014 was $1.6 million and $1.5 million, respectively. The total fair value of Restricted Shares vested during the six months ended June 30, 2015 and 2014 was $39.3 million and $34.4 million, respectively
We recorded stock-based compensation expense of $5.5 million ($8.3 million pre-tax) and $5.5 million ($8.4 million pre-tax) for the three months ended June 30, 2015 and 2014, respectively. We recorded stock-based compensation expense of $11.5 million ($17.4 million pre-tax) and $12.0 million ($18.3 million pre-tax) for the six months ended June 30, 2015 and 2014, respectively.
The following table summarizes information regarding Restricted Shares:
 
Six Months Ended June 30, 2015
 
Shares
 
Weighted Average
Grant-Date Fair
Value
Number of unvested shares:
 
 
 
Outstanding - January 1, 2015
1,856,548

 
$
52.29

Granted
648,819

 
55.86

Vested
(918,148
)
 
42.84

Canceled
(97,235
)
 
60.77

Outstanding - June 30, 2015
1,489,984

 
$
59.12

Unvested Restricted Shares outstanding as of June 30, 2015, includes approximately 732,000 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, 2013 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 1,421,000 shares based on performance targets. As of June 30, 2015, we estimate vesting of approximately 893,000 shares based on expected achievement of performance targets.

9



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 2014 Annual Report and Note 6 of this Quarterly Report for additional information on our derivatives. We enter into foreign exchange forward and swap 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 designated foreign exchange hedging instruments are highly effective as of June 30, 2015.
Foreign exchange contracts designated as hedging instruments had a notional value of $69.6 million and $125.9 million, at June 30, 2015 and December 31, 2014, respectively. Foreign exchange contracts with third parties not designated as hedging instruments had a notional value of $503.2 million and $421.1 million, at June 30, 2015 and December 31, 2014, respectively. At June 30, 2015, the length of foreign exchange contracts currently in place ranged from eight days to 30 months.
Previously, as part of our risk management program, we entered into interest rate swap agreements to hedge exposure to floating interest rates on certain portions of our debt. At June 30, 2015 we had no notional amount in outstanding interest rate swaps with third parties, compared to $40.0 million as of December 31, 2014.
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 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 foreign exchange contracts not designated as hedging instruments are summarized below:
 
June 30,
 
December 31,
(Amounts in thousands)
2015
 
2014
Current derivative assets
$
2,517

 
$
11,709

Noncurrent derivative assets
9

 
6

Current derivative liabilities
4,758

 
6,168

Noncurrent derivative liabilities
311

 
348


The fair value of interest rate swaps and foreign exchange contracts designated as hedging instruments are summarized below:
 
June 30,
 
December 31,
(Amounts in thousands)
2015
 
2014
Current derivative assets
$
152

 
$

Current derivative liabilities
$
6,467

 
$
6,952

Noncurrent derivative liabilities
61

 
411

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 June 30,
 
Six Months Ended June 30,
(Amounts in thousands)
2015
 
2014
 
2015
 
2014
Gain (loss) recognized in income
$
1,901

 
$
(1,421
)
 
$
26,981

 
$
123

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 5 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 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 and six months months ended June 30, 2015.

10




5.
Debt
Debt, including capital lease obligations, consisted of:
 
June 30,
 
  December 31,  
(Amounts in thousands, except percentages)
2015
 
2014
1.25% EUR Senior Notes due March 17, 2022, net of unamortized discount
$
553,199

 
$

4.00% USD Senior Notes due November 15, 2023, net of unamortized discount
298,791

 
298,731

3.50% USD Senior Notes due September 15, 2022, net of unamortized discount
498,547

 
498,460

Term Loan Facility, interest rate of 1.25% at June 30, 2015 and 1.51% at December 31, 2014
310,000

 
330,000

Capital lease obligations and other borrowings
32,978

 
27,731

Debt and capital lease obligations
1,693,515

 
1,154,922

Less amounts due within one year
67,365

 
53,131

Total debt due after one year
$
1,626,150

 
$
1,101,791


Senior Notes
On March 17, 2015, we completed a public offering of €500.0 million of Euro senior notes in aggregate principal amount due March 17, 2022 ("2022 EUR Senior Notes"). The 2022 EUR Senior Notes bear an interest rate of 1.25% per year, payable each year on March 17, commencing on March 17, 2016. The 2022 EUR Senior Notes were priced at 99.336% of par value, reflecting a discount to the aggregate principal amount. The proceeds of the offering were €496.7 million ($526.3 million based on exchange rates in effect at the time the offering closed). We used a portion of the proceeds of the 2022 EUR Senior Notes to ultimately fund the acquisition of SIHI described in Note 2 and anticipate utilizing the remaining portion for other general corporate purposes.

Senior Credit Facility
As discussed in Note 10 to our consolidated financial statements included in our 2014 Annual Report, our credit agreement provides for a $400.0 million term loan (“Term Loan Facility”) and a $1.0 billion 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 June 30, 2015 and December 31, 2014, we had no amounts outstanding under the Revolving Credit Facility. We had outstanding letters of credit of $85.5 million and $76.8 million at June 30, 2015 and December 31, 2014, respectively, which reduced our borrowing capacity to $914.5 million and $923.2 million, respectively. Our compliance with applicable financial covenants under the Senior Credit Facility is tested quarterly, and we complied with all covenants at June 30, 2015.
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 June 30, 2015. During the six months ended June 30, 2015, we made scheduled repayments of $20.0 million under our Term Loan Facility. We have scheduled repayments of $10.0 million due in the next quarter, $15.0 million in the fourth quarter of 2015 and $15.0 million in the first and second quarters of 2016 on our Term Loan Facility.
Our Senior Notes and Senior Credit Facility were fully and unconditionally and jointly and severally guaranteed by certain of our 100% owned domestic subsidiaries. Pursuant to the terms of the Senior Credit Facility and the indentures governing the Senior Notes, any guarantees on our obligations were subject to release if the Company satisfactorily achieved and met the following guaranty release conditions: (a) obtains a ratings of BBB (stable outlook) or better from S&P and Baa2 (stable outlook) or better from Moody’s and (b) our domestic subsidiaries do not guarantee any material indebtedness. On February 27, 2015 Standard & Poor's Ratings Services raised its corporate credit and senior unsecured debt ratings rating on the Company to BBB from BBB-, with a stable outlook. As of March 11, 2015 Moody’s Investors Services' corporate credit and senior unsecured debt ratings rating on the Company was Baa2, with a stable outlook. As a result, the guarantees of the Senior Notes and Senior Credit Facility were released as of March 26, 2015 upon the discharge of the terms of the note indentures and Senior Credit Facility agreement; therefore, the Company is exempt from disclosing supplemental guarantor financial information in accordance with Rule 3-10 of Regulation S-X, promulgated under the Securities Act of 1933.


11



6.
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 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 June 30, 2015 was $1,331.2 million compared to the carrying value of $1,350.5 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 June 30, 2015 and December 31, 2014.
7.
Inventories
Inventories, net consisted of the following:
 
June 30,
 
  December 31,  
(Amounts in thousands)
2015
 
2014
Raw materials
$
435,902

 
$
352,928

Work in process
773,981

 
687,343

Finished goods
247,512

 
265,439

Less: Progress billings
(246,543
)
 
(230,058
)
Less: Excess and obsolete reserve
(81,157
)
 
(80,088
)
Inventories, net
$
1,129,695

 
$
995,564


8.
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 June 30,
(Amounts in thousands, except per share data)
2015
 
2014
Net earnings of Flowserve Corporation
$
75,008

 
$
123,513

Dividends on restricted shares not expected to vest
3

 
3

Earnings attributable to common and participating shareholders
$
75,011

 
$
123,516

Weighted average shares:
 
 
 
Common stock
133,742

 
136,613

Participating securities
495

 
573

Denominator for basic earnings per common share
134,237

 
137,186

Effect of potentially dilutive securities
594

 
809

Denominator for diluted earnings per common share
134,831

 
137,995

Earnings per common share:
 
 
 
Basic
$
0.56

 
$
0.90

Diluted
0.56

 
0.90


12



 
Six Months Ended June 30,
(Amounts in thousands, except per share data)
2015
 
2014
Net earnings of Flowserve Corporation
$
102,674

 
$
231,247

Dividends on restricted shares not expected to vest
6

 
6

Earnings attributable to common and participating shareholders
$
102,680

 
$
231,253

Weighted average shares:
 
 
 
Common stock
134,065

 
136,868

Participating securities
513

 
592

Denominator for basic earnings per common share
134,578

 
137,460

Effect of potentially dilutive securities
815

 
972

Denominator for diluted earnings per common share
135,393

 
138,432

Earnings per common share:
 
 
 
Basic
$
0.76

 
$
1.68

Diluted
0.76

 
1.67

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.

9.
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. 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, the French authorities began an investigation of over 170 French companies, of which one of our French subsidiaries was included, concerning suspected inappropriate activities conducted in connection with the United Nations Oil for Food Program. As previously disclosed, the French investigation of our French subsidiary was formally opened in the first quarter of 2010, and our French subsidiary filed a formal response with the French court. In July 2012, the French court ruled against our procedural motions to challenge the constitutionality of the charges and quash the indictment. Hearings occurred on April 1-2, 2015, and the Company presented its defense and closing arguments. On June 18, 2015, the French court issued its ruling dismissing the case against the Company and the other defendants. However, on July 1, 2015, the French prosecutor lodged an appeal. We currently do not expect to incur additional case resolution costs of a material amount in this matter. However, if the French authorities ultimately take enforcement action against our French subsidiary regarding its investigation, we may be subject to monetary and non-monetary penalties, which we currently do not believe will have a material adverse financial impact on our company.

13



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 2014 Annual Report, we terminated an employee of an overseas subsidiary after uncovering actions that violated our Code of Business Conduct and may have violated the Foreign Corrupt Practices Act.  We have 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 are continuing to cooperate with the DOJ and SEC.  We recently received a subpoena from the SEC requesting additional information and documentation related to the matter and are in the process of responding.  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.

10.
Retirement and Postretirement Benefits
Components of the net periodic cost for retirement and postretirement benefits for the three months ended June 30, 2015 and 2014 were as follows:
 
U.S.
Defined Benefit Plans
 
Non-U.S.
Defined Benefit Plans
 
Postretirement
Medical Benefits
(Amounts in millions) 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
Service cost
$
5.9

 
$
5.8

 
$
2.0

 
$
1.8

 
$

 
$

Interest cost
4.2

 
4.3

 
2.9

 
3.7

 
0.3

 
0.3

Expected return on plan assets
(6.0
)
 
(5.5
)
 
(3.0
)
 
(2.6
)
 

 

Amortization of prior service cost
0.1

 
0.1

 

 

 
0.1

 

Amortization of unrecognized net loss (gain)
2.3

 
2.2

 
1.3

 
1.7

 
(0.2
)
 
(0.2
)
Net periodic cost recognized
$
6.5

 
$
6.9

 
$
3.2

 
$
4.6

 
$
0.2

 
$
0.1


14



Components of the net periodic cost for retirement and postretirement benefits for the six months ended June 30, 2015 and 2014 were as follows:
 
U.S.
Defined Benefit Plans
 
Non-U.S.
Defined Benefit Plans
 
Postretirement
Medical Benefits
(Amounts in millions) 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
Service cost
$
12.1

 
$
11.5

 
$
4.2

 
$
3.5

 
$

 
$

Interest cost
8.5

 
8.7

 
6.2

 
7.4

 
0.6

 
0.6

Expected return on plan assets
(12.1
)
 
(11.0
)
 
(6.0
)
 
(5.3
)
 

 

Amortization of prior service cost
0.2

 
0.2

 

 
0.1

 
0.1

 

Amortization of unrecognized net loss (gain)
4.6

 
4.2

 
2.6

 
3.4

 
(0.3
)
 
(0.6
)
Net periodic cost recognized
$
13.3

 
$
13.6

 
$
7.0

 
$
9.1

 
$
0.4

 
$


11.
Shareholders’ Equity
Dividends – On February 16, 2015, our Board of Directors authorized an increase in the payment of quarterly dividends on our common stock from $0.16 per share to $0.18 per share payable beginning on April 10, 2015. 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. 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 November 13, 2014, our Board of Directors approved a $500.0 million share repurchase authorization, which included approximately $175 million of remaining capacity under the prior $750.0 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 anytime without notice.
We repurchased 1,072,421 shares of our outstanding common stock for $59.7 million, and 573,881 shares for $43.5 million, during the three months ended June 30, 2015 and 2014, respectively. We repurchased 2,454,446 shares of our outstanding common stock for $139.6 million, and 2,010,304 shares for $153.1 million, during the six months ended June 30, 2015 and 2014, respectively. As of June 30, 2015, we have $324.8 million of remaining capacity under our current share repurchase program.
12.
Income Taxes
For the three months ended June 30, 2015, we earned $107.6 million before taxes and provided for income taxes of $30.9 million resulting in an effective tax rate of 28.7%. For the six months ended June 30, 2015, we earned $165.7 million before taxes and provided for income taxes of $59.4 million resulting in an effective tax rate of 35.9%. The effective tax rate varied from the U.S. federal statutory rate for the three months ended June 30, 2015 primarily due to the net impact of foreign operations. The effective tax rate varied from the U.S. federal statutory rate for the six months ended June 30, 2015 primarily due to tax impacts of the realignment programs and the Venezuelan exchange rate remeasurement loss, partially offset by the net impact of foreign operations.
For the three months ended June 30, 2014, we earned $176.0 million before taxes and provided for income taxes of $50.8 million, resulting in an effective tax rate of 28.9%. For the six months ended June 30, 2014, we earned $322.6 million before taxes and provided for income taxes of $88.8 million, resulting in an effective tax rate of 27.5%. The effective tax rate varied from the U.S. federal statutory rate for the three and six months ended June 30, 2014 primarily due to the net impact of foreign operations.
As of June 30, 2015, the amount of unrecognized tax benefits increased by $11.2 million from December 31, 2014. With limited exception, we are no longer subject to U.S. federal income tax audits for years through 2013, state and local income tax audits for years through 2009 or non-U.S. income tax audits for years through 2008. 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 $10 million within the next 12 months.

15



13.
Segment Information
During the three months ended March 31, 2015, we made composition changes to our Engineered Product Division ("EPD") and IPD reportable segments to take into consideration the acquisition of SIHI that was finalized on January 7, 2015. Effective January 1, 2015, certain activities, primarily related to engineered pumps and seals, that were previously included in the IPD business segment will now be reported in the EPD business segment. These changes did not materially impact segment results or segment assets. We did not change our business segments, management structure, chief operating decision maker or how we evaluate segment performance and allocate resources. Prior periods were retrospectively adjusted to conform to the new reportable segment composition. The following is a summary of the financial information of the reportable segments reconciled to the amounts reported in the condensed consolidated financial statements:
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2015
 
 
 
 
 
 
 
 
 
 
 (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
$
558,334

 
$
248,659

 
$
355,254

 
$
1,162,247

 
$

 
$
1,162,247

Intersegment sales
12,431

 
12,156

 
1,111

 
25,698

 
(25,698
)
 

Segment operating income
86,227

 
7,070

 
54,489

 
147,786

 
(20,209
)
 
127,577

 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 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
$
626,380

 
$
193,382

 
$
404,616

 
$
1,224,378

 
$

 
$
1,224,378

Intersegment sales
13,824

 
10,449

 
1,769

 
26,042

 
(26,042
)
 

Segment operating income
108,771

 
30,176

 
79,129

 
218,076

 
(23,761
)
 
194,315

 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2015
 
 
 
 
 
 
 
 
 
 
 (Amounts in thousands)
Engineered Product Division
 
Industrial Product Division
 
Flow Control Division
 
Subtotal–Reportable Segments
 
Eliminations and All Other
 
Consolidated Total
Sales to external customers
$
1,031,747

 
$
463,371

 
$
681,749

 
$
2,176,867

 
$

 
$
2,176,867

Intersegment sales
23,177

 
20,812

 
1,778

 
45,767

 
(45,767
)
 

Segment operating income (loss)
155,056

 
(6,269
)
 
109,204

 
257,991

 
(37,038
)
 
220,953

 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 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
$
1,136,691

 
$
369,376

 
$
786,447

 
$
2,292,514

 
$

 
$
2,292,514

Intersegment sales
27,609

 
20,639

 
2,877

 
51,125

 
(51,125
)
 

Segment operating income
190,136

 
48,964

 
162,262

 
401,362

 
(42,722
)
 
358,640




16



14. Accumulated Other Comprehensive Loss
The following table presents the changes in accumulated other comprehensive loss ("AOCL"), net of tax for the three months ended June 30, 2015 and 2014:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2015
 
2014
(Amounts in thousands)
Foreign currency translation items(1)
 
Pension and other post-retirement effects
 
Cash flow hedging activity
 
Total(1)
 
Foreign currency translation items(1)
 
Pension and other post-retirement effects
 
Cash flow hedging activity
 
Total(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance - April 1
$
(344,967
)
 
$
(127,507
)
 
$
(10,356
)
 
$
(482,830
)
 
$
(87,002
)
 
$
(126,749
)
 
$
(646
)
 
$
(214,397
)
Other comprehensive income (loss) before reclassifications
13,666

 
(675
)
 
1,648

 
14,639

 
7,782

 
(1,193
)
 
(167
)
 
6,422

Amounts reclassified from AOCL

 
2,455

 
1,779

 
4,234

 

 
2,656

 
102

 
2,758

Net current-period other comprehensive income (loss)
13,666

 
1,780

 
3,427

 
18,873

 
7,782

 
1,463

 
(65
)
 
9,180

Balance - June 30
$
(331,301
)
 
$
(125,727
)
 
$
(6,929
)
 
$
(463,957
)
 
$
(79,220
)
 
$
(125,286
)
 
$
(711
)
 
$
(205,217
)
_______________________________________
(1) Includes foreign currency translation adjustments attributable to noncontrolling interests of $1.3 million and $1.4 million at April 1, 2015 and 2014, $2.7 million and $1.4 million at June 30, 2015 and 2014, respectively. Includes net investment hedge losses of $6.5 million, net of deferred taxes, for the three months ended June 30, 2015. Amounts in parentheses indicate debits.
 
 
 
 
 
 
The following table presents the reclassifications out of AOCL:
 
 
 
 
 
 
 
Three Months Ended June 30,
(Amounts in thousands)
Affected line item in the statement of income
 
2015(1)
 
2014(1)
Cash flow hedging activity
 
 
 
 
 
Foreign exchange contracts
Sales
 
$
(2,522
)
 
$
(161
)
 
Tax benefit
 
743

 
59

 
 Net of tax
 
$
(1,779
)
 
$
(102
)
 
 
 
 
 
 
Pension and other postretirement effects
 
 
 
 
 
Amortization of actuarial losses(2)
 
 
$
(3,507
)
 
$
(3,605
)
  Prior service costs(2)
 
 
(156
)
 
(221
)


Tax benefit
 
1,208

 
1,170



Net of tax
 
$
(2,455
)
 
$
(2,656
)
_______________________________________
(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 10 for additional details.








17





The following table presents the changes in accumulated other comprehensive loss ("AOCL"), net of tax for the six months ended June 30, 2015 and 2014:
 
2015
 
2014
(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
$
(238,533
)
 
$
(135,398
)
 
$
(5,210
)
 
$
(379,141
)
 
$
(89,953
)
 
$
(129,528
)
 
$
(814
)
 
$
(220,295
)
Other comprehensive (loss) income before reclassifications
(92,768
)
 
4,785

 
(6,705
)
 
(94,688
)
 
5,273

 
(894
)
 
(143
)
 
4,236

Amounts reclassified from AOCL

 
4,886

 
4,986

 
9,872

 
5,460

 
5,136

 
246

 
10,842

Net current-period other comprehensive (loss) income
(92,768
)
 
9,671

 
(1,719
)
 
(84,816
)
 
10,733

 
4,242

 
103

 
15,078

Balance - June 30
$
(331,301
)
 
$
(125,727
)
 
$
(6,929
)
 
$
(463,957
)
 
$
(79,220
)
 
$
(125,286
)
 
$
(711
)
 
$
(205,217
)
_______________________________________
(1) Includes foreign currency translation adjustments attributable to noncontrolling interests of $1.3 million and $1.2 million at January 1, 2015 and 2014 and $2.7 million and $1.4 million at June 30, 2015 and 2014, respectively. Includes net investment hedge losses of $8.6 million, net of deferred taxes, for the six months ended June 30, 2015. Amounts in parentheses indicate debits.

The following table presents the reclassifications out of AOCL:
 
 
 
 
Six Months Ended June 30,
(Amounts in thousands)
 
Affected line item in the statement of income
 
2015(1)
 
2014(1)
Foreign currency translation items
 
 
 
 
 
 
Release of cumulative translation adjustments due to sale of business
 
Selling, general and administrative expense
 
$

 
$
(5,460
)
 
 
Tax benefit
 

 

 
 
 Net of tax
 
$

 
$
(5,460
)
 
 
 
 
 
 
 
Cash flow hedging activity
 
 
 
 
 
 
   Foreign exchange contracts
 
Other expense, net
 
$
(3,327
)
 
$

 
 
Sales
 
(3,704
)
 
(391
)
 
 
Tax benefit
 
2,045

 
145

 
 
 Net of tax
 
$
(4,986
)
 
$
(246
)
 
 
 
 
 
 
 
Pension and other postretirement effects
 
 
 
 
 
 
Amortization of actuarial losses(2)
 
 
 
$
(6,931
)
 
$
(7,031
)
Prior service costs(2)
 
 
 
(354
)
 
(339
)
 
 
Tax benefit
 
2,399

 
2,234

 
 
Net of tax
 
$
(4,886
)
 
$
(5,136
)
_______________________________________

18



(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 10 for additional details.

At June 30, 2015, we expect to recognize a loss of $4.6 million, net of deferred taxes, into earnings in the next twelve months related to designated cash flow hedges based on their fair values at June 30, 2015.
15. Realignment Programs
In the first quarter of 2015, we initiated a realignment program ("R1 Realignment Program") to reduce and optimize certain non-strategic QRCs and manufacturing facilities from the SIHI acquisition. We anticipate a total investment in this program of approximately $54 million of which approximately $46 million is related to identified initiatives and is primarily restructuring, including related severance costs and primarily incurred by IPD. Realignment charges of $28.9 million were recorded in IPD, $0.7 million in EPD and $5.5 million was reported in income tax expense in our condensed consolidated statement of income for the six months ended June 30, 2015. We anticipate that the majority of any remaining charges will be incurred through the remainder of 2015 and 2016.
In the second quarter of 2015, we initiated a second realignment program ("R2 Realignment Program") to better align costs and improve long-term efficiency, including further manufacturing optimization, through the transfer of activities from high-cost regions to lower-cost facilities, consolidation of facilities and a reduction in our workforce. We anticipate a total investment in this program of approximately $100 million. We anticipate that the majority of the charges will be incurred through the remainder of 2015 and 2016.
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.
Total realignment charges were $33.2 million and $0.8 million for the three months ended June 30, 2015 and 2014, respectively. Total realignment charges were $59.4 million and $1.9 million for the six months ended June 30, 2015 and 2014, respectively. Generally, the aforementioned charges will be paid in cash, except for asset write-downs, which are non-cash charges. The total restructuring reserve related to our realignment programs was $33.0 million and $1.1 million at June 30, 2015 and December 31, 2014, respectively.
R1 Realignment Program
The following is a summary of total charges related to the R1 Realignment Program:
 
 (Amounts in thousands)
Three Months Ended June 30, 2015
Six Months Ended June 30, 2015
Restructuring Charges
 
 
     COS
$
5,311

$
18,639

     SG&A
2,690

10,245

 
$
8,001

$
28,884

Non-Restructuring Charges
 
 
     COS
$

$

     SG&A
68

700

 
$
68

$
700

Total Realignment Program Charges
 
 
     COS
$
5,311

$
18,639

   SG&A
2,758

10,945

 
$
8,069

$
29,584



19



The following represents the activity, primarily severance, related to the restructuring reserve for the R1 Realignment Program:
 
 
(Amounts in thousands)
Balance at December 31, 2014
 
$

Charges
 
20,883

Cash Expenditures
 

Other non-cash adjustments, including currency
 
(579
)
Balance at March 31, 2015
 
$
20,304

Charges
 
8,001

Cash Expenditures
 
(243
)
Other non-cash adjustments, including currency
 
875

Balance at June 30, 2015
 
$
28,937

R2 Realignment Program
The following is a summary of total charges related to the R2 Realignment Program:
 
 
 
 
 
 
 
 
 
 
 
Three and Six Months Ended June 30, 2015
 
 
 
 
 
 
 
 
 
 
 (Amounts in thousands)
Engineered Product Division
 
Industrial Product Division
 
Flow Control Division
 
Subtotal–Reportable Segments
 
Eliminations and All Other
 
Consolidated Total
Restructuring Charges
 
 
 
 
 
 
 
 
 
 
 
     COS
$
110

 
$

 
$
1,019

 
$
1,129

 
$

 
$
1,129

     SG&A
122

 

 
2,342

 
2,464

 

 
2,464

 
$
232

 
$

 
$
3,361

 
$
3,593

 
$

 
$
3,593

Non-Restructuring Charges
 
 
 
 
 
 
 
 
 
 
 
     COS
$
7,069

 
$
927

 
$
5,091

 
$
13,087

 
$

 
$
13,087

     SG&A
2,160

 
1,194

 
3,924

 
7,278

 

 
7,278

 
$
9,229

 
$
2,121

 
$
9,015

 
$
20,365

 
$

 
$
20,365

Total Realignment Program Charges
 
 
 
 
 
 
 
 
 
 
 
     COS
$
7,179

 
$
927

 
$
6,110

 
$
14,216

 
$

 
$
14,216

     SG&A
2,282

 
1,194

 
6,266

 
9,742

 

 
9,742

 
$
9,461

 
$
2,121

 
$
12,376

 
$
23,958

 
$

 
$
23,958



20



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 and inventory write-downs. Other costs generally includes costs related to employee relocation, asset relocation, vacant facility costs (i.e., taxes and insurance) and other charges.
Restructuring charges for the R2 Realignment Program are as follows:
 
 
 
 
 
 
 
 
 
 
 (Amounts in thousands)
Severance
 
Contract Termination
 
Asset Write-Downs
 
Other
 
Total
Three and Six Months Ended June 30, 2015
 
 
 
 
 
 
 
 
 
     COS
$
973

 
$

 
$
107

 
$
49

 
$
1,129

     SG&A
1,754

 

 
634

 
76

 
2,464

Total
$
2,727

 
$

 
$
741

 
$
125

 
$
3,593


The following represents the activity, primarily severance, related to the restructuring reserve for the R2 Realignment Program:
 
 
(Amounts in thousands)
Balance at March 31, 2015
 
$

Charges
 
2,852

Cash Expenditures
 
(166
)
Other non-cash adjustments, including currency
 
737

Balance at June 30, 2015
 
$
3,423


Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements, and notes thereto, and the other financial data included elsewhere in this Quarterly Report. The following discussion should also be read in conjunction with our audited consolidated financial statements, and notes thereto, and "Management’s Discussion and Analysis of Financial Condition and Results of Operations" ("MD&A") included in our 2014 Annual Report.
EXECUTIVE OVERVIEW
Our Company
We believe that we are a world-leading manufacturer and aftermarket service provider of comprehensive flow control systems. We develop and manufacture precision-engineered flow control equipment integral to the movement, control and protection of the flow of materials in our customers’ critical processes. Our product portfolio of pumps, valves, seals, automation and aftermarket services supports global infrastructure industries, including oil and gas, chemical, power generation and water management, as well as general industrial markets where our products and services add value. Through our manufacturing platform and global network of Quick Response Centers ("QRCs"), we offer a broad array of aftermarket equipment services, such as installation, advanced diagnostics, repair and retrofitting. We currently employ approximately 19,000 employees in more than 50 countries.
Our business model is significantly influenced by the capital spending of global infrastructure industries for the placement of new products into service and aftermarket services for existing operations. The worldwide installed base of our products is an important source of aftermarket revenue, where products are expected to ensure the maximum operating time of many key industrial processes. Over the past several years, we have significantly invested in our aftermarket strategy to provide local support to drive customer investments in our offerings and use of our services to replace or repair installed products. The aftermarket portion of our business also helps provide business stability during various economic periods. The aftermarket business, which is served by our network of 193 QRCs located around the globe, provides a variety of service offerings for our customers including spare parts, service solutions, product life cycle solutions and other value-added services. It is generally a higher margin business compared to our original equipment business and a key component of our profitable growth strategy.

21



Our operations are conducted through three business segments that are referenced throughout this MD&A:
EPD for long lead-time, custom and other highly-engineered pumps and pump systems, mechanical seals, auxiliary systems and replacement parts and related services;
IPD for engineered and pre-configured industrial pumps and pump systems and related products and services; and
FCD for engineered and industrial valves, control valves, actuators and controls and related services.
Our business segments share a focus on industrial flow control technology and have a high number of common customers. These segments also have complementary product offerings and technologies that are often combined in applications that provide us a net competitive advantage. Our segments also benefit from our global footprint and our economies of scale in reducing administrative and overhead costs to serve customers more cost effectively. For example, our segment leadership reports to our Chief Operating Officer ("COO") and the segments share leadership for operational support functions, such as research and development, marketing and supply chain.
The reputation of our product portfolio is built on more than 50 well-respected brand names such as Worthington, IDP, Valtek, Limitorque, Durco, Edward, Anchor/Darling, SIHI, Halberg and Durametallic, which we believe to be one of the most comprehensive in the industry. Our products and services are sold either directly or through designated channels to more than 10,000 companies, including some of the world’s leading engineering, procurement and construction ("EPC") firms, original equipment manufacturers, distributors and end users.
We continue to build on our geographic breadth through our QRC network with the goal to be positioned as near to customers as possible for service and support in order to capture valuable aftermarket business. Along with ensuring that we have the local capability to sell, install and service our equipment in remote regions, it is equally imperative to continuously improve our global operations. We continue to expand our global supply chain capability to meet global customer demands and ensure the quality and timely delivery of our products. We continue to devote resources to improving the supply chain processes across our business segments to find areas of synergy and cost reduction and to improve our supply chain management capability to ensure it can meet global customer demands. We also remain focused on improving on-time delivery and quality, while managing warranty costs as a percentage of sales across our global operations, through the assistance of a focused Continuous Improvement Process ("CIP") initiative. The goal of the CIP initiative, which includes lean manufacturing, six sigma business management strategy and value engineering, is to maximize service fulfillment to customers through on-time delivery, reduced cycle time and quality at the highest internal productivity.
Our solid operational foundation enables us to take advantage of market conditions and maintain solid margins and our competitive position going forward. Our pursuit of major capital projects globally and our investments in localized customer service remain key components of our long-term growth strategy, and also provide stability during various economic periods. We believe that our commitment to localize service support capabilities close to our customers' operations through our QRC network has enabled us to grow our market share in the aftermarket portion of our business. We believe that with our customer relationships, global presence and highly-regarded technical capabilities, we will continue to have opportunities in our core industries; however, we face ongoing challenges affecting many companies in our industry with a significant multinational presence, such as economic, political, currency and other risks.
During the first six months of 2015, we were challenged by broad-based capital spending declines, originating in the oil and gas industry, heightened pricing pressures and negative currency impacts caused by a stronger U.S. dollar. This was further compounded by economic and geo-political conditions in Latin America and the Middle East, and by strikes in several U.S. refineries. In addition, we experienced reduced activity levels in our aftermarket business due to deferred spending of our customers' repair and maintenance budgets. We expect that the current environment will persist at least for the remainder of 2015.
To better align costs and improve long-term efficiency, we initiated realignment programs to accelerate both short- and long-term strategic plans, including targeted manufacturing optimization, through the transfer of activities from high-cost regions to lower-cost facilities, consolidation of facilities and SG&A efficiency initiatives. We estimate an approximate 5% reduction in our global workforce. With an expected near-term investment of approximately $150 million, including projects not yet approved, we expect the results of our realignment programs will deliver annualized run-rate savings of approximately $100 million. In addition, we are focusing on our ongoing low-cost sourcing, including greater use of third-party suppliers and increasing our lower-cost, emerging market capabilities.

RESULTS OF OPERATIONS — Three and six months ended June 30, 2015 and 2014
Throughout this discussion of our results of operations, we discuss the impact of fluctuations in foreign currency exchange rates. We have calculated currency effects on operations by translating current year results on a monthly basis at prior year exchange rates for the same periods.

22



As discussed in Note 2 to our condensed consolidated financial statements included in this Quarterly Report, effective January 7, 2015, we acquired for inclusion in IPD, 100% of SIHI, a global provider of engineered vacuum and fluid pumps and related services. The impact of the acquisition of SIHI for the three months ended June 30, 2015 includes bookings of $61.5 million, sales of $77.2 million, gross profit of $8.9 million, operating loss of $16.4 million (including realignment costs of $8.0 million and acquisition-related costs of $2.3 million) and period end backlog of $132.2 million. The impact of the acquisition of SIHI for the six months ended June 30, 2015 includes bookings of $146.7 million, sales of $144.1 million, gross profit of $8.2 million and operating loss of $49.2 million (including acquisition-related costs of $7.3 million and realignment costs of $29.6 million).
As discussed in Note 2 to our condensed consolidated financial statements included in this Quarterly Report, effective March 31, 2014 we sold our FCD Naval business to a Finnish valve manufacturer and recognized a $13.4 million gain.
In the first quarter of 2015, we initiated the R1 Realignment Program to reduce and optimize certain non-strategic QRCs and manufacturing facilities from the SIHI acquisition. We anticipate a total investment in this program of approximately $54 million.
In the second quarter of 2015, we initiated the R2 Realignment Program to better align costs and improve long-term efficiency, including further manufacturing optimization, through the transfer of activities from high-cost regions to lower-cost facilities, consolidation of facilities and a reduction in our workforce. We anticipate a total investment in this program of approximately $100 million.
The total charges for realignment programs by segment are detailed below for the three months ended June 30, 2015:
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2015
 
 
 
 
 
 
 
 
 
 
 (Amounts in thousands)
Engineered Product Division
 
Industrial Product Division
 
Flow Control Division
 
Subtotal–Reportable Segments
 
Eliminations and All Other
 
Consolidated Total
Total Realignment Program Charges
 
 
 
 
 
 
 
 
 
 
 
     COS
$
7,228

 
$
6,285

 
$
6,112

 
$
19,625

 
$

 
$
19,625

     SG&A
2,734

 
4,047

 
6,225

 
13,006

 

 
$
13,006

 
$
9,962

 
$
10,332

 
$
12,337

 
$
32,631

 
$

 
$
32,631

In addition to the charges above, $0.5 million related to the R1 Realignment Program was reported in income tax expense in our condensed consolidated statement of income for the three months ended June 30, 2015.
The total charges for realignment programs by segment are detailed below for the six months ended June 30, 2015:
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2015
 
 
 
 
 
 
 
 
 
 
 (Amounts in thousands)
Engineered Product Division
 
Industrial Product Division
 
Flow Control Division
 
Subtotal–Reportable Segments
 
Eliminations and All Other
 
Consolidated Total
Total Realignment Program Charges
 
 
 
 
 
 
 
 
 
 
 
     COS
$
7,243

 
$
19,444

 
$
6,112

 
$
32,799

 
$

 
$
32,799

     SG&A
3,366

 
11,531

 
6,199

 
$
21,096

 

 
21,096

 
$
10,609

 
$
30,975

 
$
12,311

 
$
53,895

 
$

 
$
53,895

In addition to the charges above reported in COS or SG&A, $5.5 million related to the R1 Realignment Program was reported in income tax expense in our condensed consolidated statement of income for the six months ended June 30, 2015. We anticipate that the majority of the remaining charges related to our realignment programs will be incurred through the remainder of 2015 and early 2016.
Upon completion of the realignment programs, we expect annual run-rate cost savings of approximately $100 million, with a portion realized in 2015 and an increasingly larger amount in 2016 and 2017. Actual savings realized could vary from expected savings, which represent management’s best estimate to date.


23



Consolidated Results
Bookings, Sales and Backlog
 
Three Months Ended June 30,
(Amounts in millions)
2015
 
2014
Bookings
$
1,115.4

 
$
1,384.2

Sales
1,162.2

 
1,224.4

 
Six Months Ended June 30,
(Amounts in millions)
2015
 
2014
Bookings
$
2,157.1

 
$
2,577.7

Sales
2,176.9

 
2,292.5


We define a booking as the receipt of a customer order that contractually engages us to perform activities on behalf of our customer with regard to manufacturing, service or support. Bookings recorded and subsequently canceled within the year-to-date period are excluded from year-to-date bookings. Bookings for the three months ended June 30, 2015 decreased by $268.8 million, or 19.4%, as compared with the same period in 2014. The decrease included negative currency effects of approximately $118 million. The decrease during the three months ended June 30, 2015 was primarily driven by the oil and gas industry, and to a lesser extent, chemical and general industries. The decrease was more heavily weighted toward customer original equipment bookings. Excluding the $61.5 million impact of SIHI, bookings for the three months ended June 30, 2015 decreased by $330.3 million, or 23.9%, as compared with the same period in 2014.

Bookings for the six months ended June 30, 2015 decreased by $420.6 million, or 16.3%, as compared with the same period in 2014. The decrease included negative currency effects of approximately $198 million. The decrease during the six months ended June 30, 2015 was primarily driven by the oil and gas industry, and to a lesser extent, chemical, general industries and the power generation industries. The decrease was more heavily weighted toward customer original equipment bookings. Excluding the $146.7 million impact of SIHI, bookings for the six months ended June 30, 2015 decrease by $567.3 million, or 22.0%, as compared with the same period in 2014.

Sales for the three months ended June 30, 2015 decreased by $62.2 million, or 5.1%, as compared with the same period in 2014. The decrease included negative currency effects of approximately $121 million. The decrease was more heavily weighted towards original equipment sales, and decreased sales into Asia Pacific, Latin America and the Middle East were partially offset by increased sales into Europe. Net sales to international customers, including export sales from the U.S., were approximately 65% and 68% of total sales for the three months ended June 30, 2015 and 2014, respectively. Excluding the $77.2 million impact of SIHI, sales for the three months ended June 30, 2015 decreased by $139.4 million, or 11.4%, as compared with the same period in 2014.

Sales for the six months ended June 30, 2015 decreased by $115.6 million, or 5.0%, as compared with the same period in 2014. The decrease included negative currency effects of approximately $209 million. The decrease was more heavily weighted towards original equipment sales, and decreased sales into Asia Pacific, Latin America and the Middle East were partially offset by increased sales into Europe and North America. Net sales to international customers, including export sales from the U.S., were approximately 65% and 68% of total sales for the six months ended June 30, 2015 and 2014, respectively. Excluding the $144.1 million impact of SIHI, sales for the six months ended June 30, 2015 decreased by $259.7 million, or 11.3%, as compared with the same period in 2014.
Backlog represents the aggregate value of booked but uncompleted customer orders and is influenced primarily by bookings, sales, cancellations and currency effects. Backlog of $2,675.6 million at June 30, 2015 decreased by $28.6 million, or 1.1%, as compared with December 31, 2014. Currency effects provided a decrease of approximately $103 million. Approximately 25% of the backlog at June 30, 2015 was related to aftermarket orders. Excluding the $132.2 million impact of SIHI, backlog decreased by $160.8 million, or 5.9%, as compared with December 31, 2014.

Gross Profit and Gross Profit Margin

24



 
Three Months Ended June 30,
(Amounts in millions, except percentages)
2015
 
2014
Gross profit
$
369.1

 
$
430.3

Gross profit margin
31.8
%
 
35.1
%
 
Six Months Ended June 30,
(Amounts in millions, except percentages)
2015
 
2014
Gross profit
$
700.8

 
$
807.4

Gross profit margin
32.2
%
 
35.2
%

Gross profit for the three months ended June 30, 2015 decreased by $61.2 million, or 14.2%, as compared with the same period in 2014. Gross profit margin for the three months ended June 30, 2015 of 31.8% decreased from 35.1% for the same period in 2014. The decrease was primarily attributed to charges related to our realignment programs, and to a lesser extent, certain lower margin projects that shipped from backlog and the negative impact of decreased sales on our absorption of fixed manufacturing costs, as compared with the same period in 2014, partially offset by a decrease in broad-based annual incentive program compensation and a mix shift to higher margin aftermarket sales. Aftermarket sales increased to approximately 42% of total sales, as compared with approximately 41% of total sales for the same period in 2014.

Gross profit for the six months ended June 30, 2015 decreased by $106.6 million, or 13.2%, as compared with the same period in 2014. Gross profit margin for the six months ended June 30, 2015 of 32.2% decreased from 35.2% for the same period in 2014. The decrease in gross profit margin was primarily attributed to the negative impact of margins on acquired SIHI backlog and inventory ("Purchase Price Adjustments"), charges related to our realignment programs, and to a lesser extent, certain lower margin projects that shipped from backlog and the negative impact of decreased sales on our absorption of fixed manufacturing costs, as compared with the same period in 2014, partially offset by a decrease in broad-based annual incentive program compensation and a mix shift to higher margin aftermarket sales. Aftermarket sales increased to approximately 43% of total sales, as compared with approximately 42% of total sales for the same period in 2014.

Selling, General and Administrative Expense ("SG&A")
 
Three Months Ended June 30,
(Amounts in millions, except percentages)
2015
 
2014
SG&A
$
243.6

 
$
238.2

SG&A as a percentage of sales
21.0
%
 
19.5
%
 
Six Months Ended June 30,
(Amounts in millions, except percentages)
2015
 
2014
SG&A
$
483.5

 
$