NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF
DECEMBER 31, 2016
AND
2015
AND FOR THE
THREE YEARS ENDED
DECEMBER 31, 2016
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1.
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SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING DEVELOPMENTS
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We are principally engaged in the worldwide design, manufacture, distribution and service of industrial flow management equipment. We provide long lead time, custom and other highly-engineered pumps; standardized, general-purpose pumps; mechanical seals; industrial valves; and related automation products and solutions primarily for oil and gas, chemical, power generation, water management and other general industries requiring flow management products and services. Equipment manufactured and serviced by us is predominantly used in industries that deal with difficult-to-handle and corrosive fluids, as well as environments with extreme temperatures, pressure, horsepower and speed. Our business is affected by economic conditions in the United States ("U.S.") and other countries where our products are sold and serviced, by the cyclical nature and competitive environment of our industries served, by the relationship of the U.S. dollar to other currencies and by the demand for and pricing of our customers’ end products.
Revision to Previously Reported Financial Information -
In the second quarter of 2017, we identified accounting errors focused mainly at two of our non-U.S. sites in the inventory, accounts receivable, cost of sales and selling, general and administrative expense balances for prior periods through the first quarter of 2017.
We have assessed these errors, individually and in the aggregate, and concluded that they are not material to any prior annual or interim period. However, to facilitate comparisons among periods we have revised our previously issued audited consolidated financial information for the fiscal years ended December 31, 2014, 2015 and 2016 and unaudited condensed consolidated financial information for the interim periods of 2016 and the three months ended March 31, 2017. We also corrected the timing of immaterial previously recorded out-of-period adjustments and reflected them in the revised prior period financial statements, where applicable. Prior periods not presented herein will be revised, as applicable, in future filings.
See Note 2 for more information.
Venezuela
—
Our operations in Venezuela primarily consist of a service center that performs service and repair activities. Our Venezuelan subsidiary's sales for the year ended
December 31, 2016
represented less than
0.5%
of consolidated sales and its assets at
December 31, 2016
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
December 31, 2016
. 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 continue to experience delays in collecting payment on our accounts receivable from the national oil company in Venezuela, our primary Venezuelan customer. Our total outstanding gross accounts receivable with this customer was approximately
6%
and
7%
of our gross accounts receivable at
December 31, 2016
and December 31, 2015, respectively,
of which 100% and 64% has been classified as long-term within other assets, net on our condensed consolidated balance sheet at December 31, 2016 and 2015, respectively. These accounts receivable are primarily U.S. dollar-denominated and not disputed. However, while we have not historically had write-offs relating to this customer, the accounts receivable continue to be significantly in arrears. The increased deterioration of the social, political, economic and legal climate in 2016 has given rise to significant uncertainties about Venezuela's economic and political stability, and while we continue to conduct business on a prepayment basis with the Venezuelan customer, the volume of activity has diminished significantly throughout 2016 from prior year levels. In September 2016, the Venezuelan customer offered current bondholders the ability to swap their current bonds for new bonds with a delayed maturity, price premium and higher coupon rate due to their current inability to service their debt obligations. As a result of the bond swap offer, S&P Global Ratings downgraded the customer's bonds to CC which potentially indicates that default is imminent with little prospect for recovery. Although we do not currently hold any related bonds, we interpreted this action to be indicative of the customer's increasing inability to make future payments on our accounts receivable. Accordingly, due to these actions and the diminished activity of business and payments in 2016, we estimated that our ability to fully collect the accounts receivable from our primary Venezuelan customer became less than probable and in the third quarter of 2016 we recorded a charge of $73.5 million to selling, general and administrative expense ("SG&A") to fully reserve for those potentially uncollectible accounts receivable and a charge to cost of sales ("COS") of $1.9 million to reserve for related net inventory exposures. We continue to pursue payments and on-going business with our Venezuelan customer.
At
December 31, 2016
the DICOM exchange rate (formerly SIMADI) was
674
bolivars to the U.S. dollar, compared with the official exchange rate of
10.0
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 income (expense), net and
$2.1 million
in cost of goods sold in our condensed consolidated statement of income and resulted in no tax benefit. As of
December 31, 2016
, we believe the DICOM 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.
Principles of Consolidation
— The consolidated financial statements include the accounts of our company and our wholly and majority-owned subsidiaries. In addition, we would consolidate any variable interest entities for which we are deemed to be the primary beneficiary. Noncontrolling interests of non-affiliated parties have been recognized for all majority-owned consolidated subsidiaries. Intercompany profits/losses, transactions and balances among consolidated entities have been eliminated from our consolidated financial statements. Investments in unconsolidated affiliated companies, which represent noncontrolling ownership interests between
20%
and
50%
, are accounted for using the equity method, which approximates our equity interest in their underlying equivalent net book value under accounting principles generally accepted in the U.S. ("U.S. GAAP"). Investments in interests where we own less than
20%
of the investee are accounted for by the cost method, whereby income is only recognized in the event of dividend receipt. Investments accounted for by the cost method are tested for impairment if an impairment indicator is present.
Use of Estimates
— The process of preparing financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect reported amounts of certain assets, liabilities, revenues and expenses. We believe our estimates and assumptions are reasonable; however, actual results may differ materially from such estimates. The most significant estimates and assumptions are used in determining:
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Timing and amount of revenue recognition;
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•
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Deferred taxes, tax valuation allowances and tax reserves;
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Reserves for contingent loss;
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•
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Pension and postretirement benefits; and
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Valuation of goodwill, indefinite-lived intangible assets and other long-lived assets.
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Revenue Recognition
—
Revenues for product sales are recognized when the risks and rewards of ownership are transferred to the customers, which is typically based on the contractual delivery terms agreed to with the customer and fulfillment of all but inconsequential or perfunctory actions. In addition, our policy requires persuasive evidence of an arrangement, a fixed or determinable sales price and reasonable assurance of collectibility. We defer the recognition of revenue when advance payments are received from customers before performance obligations have been completed and/or services have been performed. Freight charges billed to customers are included in sales and the related shipping costs are included in cost of sales in our consolidated statements of income. Our contracts typically include cancellation provisions that require customers to reimburse us for costs incurred up to the date of cancellation, as well as any contractual cancellation penalties.
We enter into certain agreements with multiple deliverables that may include any combination of designing, developing, manufacturing, modifying, installing and commissioning of flow management equipment and providing services related to the performance of such products.
Delivery of these products and services typically occurs within a
one
to
two
-year period,
although many arrangements, such as "short-cycle" type orders, have a shorter timeframe for delivery
.
We separate deliverables into units of accounting based on whether the deliverable(s) have standalone value to the customer (impact of general rights of return is immaterial). Contract value is allocated ratably to the units of accounting in the arrangement based on their relative selling prices determined as if the deliverables were sold separately.
Revenues for long-term contracts that exceed certain internal thresholds regarding the size and duration of the project and provide for the receipt of progress billings from the customer are recorded on the percentage of completion method with progress measured on a cost-to-cost basis.
Percentage of completion revenue represents less than 5% of our consolidated sales as of December 31, 2016 and 7% as of December 31, 2015 and 2014.
Revenue on service and repair contracts is recognized after services have been agreed to by the customer and rendered. Revenues generated under fixed fee service and repair contracts are recognized on a ratable basis over the term of the contract.
These contracts can range in duration, but generally extend for up to
five years
.
Fixed fee service contracts represent approximately
1%
of consolidated sales for each year presented.
In certain instances, we provide guaranteed completion dates under the terms of our contracts. Failure to meet contractual delivery dates can result in late delivery penalties or non-recoverable costs. In instances where the payment of such costs are deemed to be probable, we perform a project profitability analysis, accounting for such costs as a reduction of realizable revenues, which could potentially cause estimated total project costs to exceed projected total revenues realized from the project. In such instances, we would record reserves to cover such excesses in the period they are determined. In circumstances where the total projected revenues still exceed total projected costs, the incurrence of penalties or non-recoverable costs generally reduces profitability of the project at the time of subsequent revenue recognition.
Cash and Cash Equivalents
— We place temporary cash investments with financial institutions and, by policy, invest in those institutions and instruments that have minimal credit risk and market risk. These investments, with an original maturity of three months or less when purchased, are classified as cash equivalents. They are highly liquid and principal values are not subject to significant risk of change due to interest rate fluctuations.
Allowance for Doubtful Accounts and Credit Risk
— The allowance for doubtful accounts is established based on estimates of the amount of uncollectible accounts receivable, which is determined principally based upon the aging of the accounts receivable, but also customer credit history, industry and market segment information, economic trends and conditions and credit reports. Customer credit issues, customer bankruptcies or general economic conditions may also impact our estimates.
Credit risks are mitigated by the diversity of our customer base across many different geographic regions and industries and by performing creditworthiness analyses on our customers. Additionally, we mitigate credit risk through letters of credit and advance payments received from our customers. In
2016
we have experienced increased aging and slower collection of receivables with our primary Venezuelan customer. Due to certain actions of this customer and the diminished activity of business and payments in 2016, we have estimated that our ability to fully collect the accounts receivable from our primary Venezuelan customer has become less than probable and we recorded a charge to selling, general and administrative expense ("SG&A") to fully reserve for those potential uncollectible accounts receivable and a charge to cost of sales ("COS") to reserve for related net inventory exposures. We do not believe that we have any other significant concentrations of credit risk.
Inventories and Related Reserves
— Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out method. Reserves for excess and obsolete inventories are based upon our assessment of market conditions for our products determined by historical usage and estimated future demand. Due to the long life cycles of our products, we carry spare parts inventories that have historically low usage rates and provide reserves for such inventory based on demonstrated usage and aging criteria.
Income Taxes, Deferred Taxes, Tax Valuation Allowances and Tax Reserves
— We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are calculated using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. We record valuation allowances to reflect the estimated amount of deferred tax assets that may not be realized based upon our analysis of existing deferred tax assets, net operating losses and tax credits by jurisdiction and expectations of our ability to utilize these tax attributes through a review of past, current and estimated future taxable income and establishment of tax strategies.
We provide deferred taxes for the temporary differences associated with our investment in foreign subsidiaries that have a financial reporting basis that exceeds tax basis, unless we can assert permanent reinvestment in foreign jurisdictions. Financial reporting basis and tax basis differences in investments in foreign subsidiaries consist of both unremitted earnings and losses, as well as foreign currency translation adjustments.
The amount of income taxes we pay is subject to ongoing audits by federal, state, and foreign tax authorities, which often result in proposed assessments. We establish reserves for open tax years for uncertain tax positions that may be subject to challenge by various tax authorities. The consolidated tax provision and related accruals include the impact of such reasonably estimable losses and related interest and penalties as deemed appropriate.
We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities. The determination is based on the technical merits of the position and presumes that each uncertain tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement.
Legal and Environmental Contingencies
— Legal and environmental reserves are recorded based upon a case-by-case analysis of the relevant facts and circumstances and an assessment of potential legal obligations and costs. Amounts relating to legal and environmental liabilities are recorded when it is probable that a loss has been incurred and such loss is estimable. Assessments of legal and environmental costs are based on information obtained from our independent and in-house experts and our loss experience in similar situations. Estimates are updated as applicable when new information regarding the facts and circumstances of each matter becomes available. Legal fees associated with legal and environmental liabilities are expensed as incurred.
Estimates of liabilities for unsettled asbestos-related claims are based on known claims and on our experience during the preceding two years for claims filed, settled and dismissed, with adjustments for events deemed unusual and unlikely to recur, and are included in retirement obligations and other liabilities in our consolidated balance sheets. A substantial majority of our asbestos-related claims are covered by insurance or indemnities. Estimated indemnities and receivables from insurance carriers for unsettled claims and receivables for settlements and legal fees paid by us for asbestos-related claims are estimated using our historical experience with insurance recovery rates and estimates of future recoveries, which include estimates of coverage and financial viability of our insurance carriers. Estimated receivables are included in other assets, net in our consolidated balance sheets.
We have claims pending against certain insurers that, if resolved more favorably than estimated future recoveries, 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 existing indemnities and insurance coverage.
Warranty Accruals
— Warranty obligations are based upon product failure rates, materials usage, service delivery costs, an analysis of all identified or expected claims and an estimate of the cost to resolve such claims. The estimates of expected claims are generally a factor of historical claims and known product issues. Warranty obligations based on these factors are adjusted based on historical sales trends for the preceding
24 months
.
Insurance Accruals
— Insurance accruals are recorded for wholly or partially self-insured risks such as medical benefits and workers’ compensation and are based upon an analysis of our claim loss history, insurance deductibles, policy limits and other relevant factors that are updated annually and are included in accrued liabilities in our consolidated balance sheets. The estimates are based upon information received from actuaries, insurance company adjusters, independent claims administrators or other independent sources. Receivables from insurance carriers are estimated using our historical experience with insurance recovery rates and estimates of future recoveries, which include estimates of coverage and financial viability of our insurance carriers. Estimated receivables are included in accounts receivable, net and other assets, net, as applicable, in our consolidated balance sheets.
Pension and Postretirement Obligations
— Determination of pension and postretirement benefits obligations is based on estimates made by management in consultation with independent actuaries and investment advisors. Inherent in these valuations are assumptions including discount rates, expected rates of return on plan assets, retirement rates, mortality rates and rates of compensation increase and other factors all of which are reviewed annually and updated if necessary. Current market conditions, including changes in rates of return, interest rates and medical inflation rates, are considered in selecting these assumptions.
Actuarial gains and losses and prior service costs are recognized in accumulated other comprehensive loss as they arise and we amortize these costs into net pension expense over the remaining expected service period.
Property, Plant and Equipment and Depreciation
— Property, plant and equipment are stated at historical cost, less accumulated depreciation. If asset retirement obligations exist, they are capitalized as part of the carrying amount of the asset and depreciated over the remaining useful life of the asset. The useful lives of leasehold improvements are the lesser of the remaining lease term or the useful life of the improvement. When assets are retired or otherwise disposed of, their costs and related accumulated depreciation are removed from the accounts and any resulting gains or losses are included in income from operations for the period. Depreciation is computed by the straight-line method based on the estimated useful lives of
the depreciable assets, or in the case of assets under capital leases, over the related lease turn. Generally, the estimated useful lives of the assets are:
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Buildings and improvements
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10 to 40 years
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Machinery, equipment and tooling
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3 to 14 years
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Software, furniture and fixtures and other
|
3 to 7 years
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Costs related to routine repairs and maintenance are expensed as incurred.
Internally Developed Software
— We capitalize certain costs associated with the development of internal-use software. Generally, these costs are related to significant software development projects and are amortized over their estimated useful life, typically three to five years, upon implementation of the software.
Intangible Assets
— Intangible assets, excluding trademarks (which are considered to have an indefinite life), consist primarily of engineering drawings, patents, existing customer relationships, software, distribution networks and other items that are being amortized over their estimated useful lives generally ranging from
four
to
40 years
. These assets are reviewed for impairment whenever events and circumstances indicate impairment may have occurred.
Valuation of Goodwill, Indefinite-Lived Intangible Assets and Other Long-Lived Assets
— The value of goodwill and indefinite-lived intangible assets is tested for impairment as of December 31 each year or whenever events or circumstances indicate such assets may be impaired.
The identification of our reporting units began at the operating segment level and considered whether components one level below the operating segment levels should be identified as reporting units for purpose of testing goodwill for impairment based on certain conditions. These conditions included, among other factors, (i) the extent to which a component represents a business and (ii) the aggregation of economically similar components within the operating segments and resulted in five reporting units. Other factors that were considered in determining whether the aggregation of components was appropriate included the similarity of the nature of the products and services, the nature of the production processes, the methods of distribution and the types of industries served.
An impairment loss for goodwill is recognized if the implied fair value of goodwill is less than the carrying value. We estimate the fair value of our reporting units based on an income approach, whereby we calculate the fair value of a reporting unit based on the present value of estimated future cash flows. A discounted cash flow analysis requires us to make various judgmental assumptions about future sales, operating margins, growth rates and discount rates, which are based on our budgets, business plans, economic projections, anticipated future cash flows and market participants. Assumptions are also made for varying perpetual growth rates for periods beyond the long-term business plan period.
We did not record an impairment of goodwill in 2016, 2015 or 2014; however the estimated fair value of our Engineered Product Operations ("EPO") and IPD reporting units reduced significantly due to broad-based capital spending declines and heightened pricing pressure experienced in the oil and gas markets which are anticipated to continue in the near to mid-term. The EPO reporting unit is a component of our EPD reporting segment and is primarily focused on long lead time, custom and other highly-engineered pumps and pump systems. As of December 31, 2016 our EPO reporting unit had approximately $156 million of goodwill and its estimated fair value exceeded its carrying value by approximately 45%. In addition, our IPD reporting unit, which is primarily focused on pre-configured industrial pumps and pump systems had approximately $298 million of goodwill and it fair value exceeded its carrying value by approximately 70%. Key assumptions used in determining the estimated fair value of our EPO and IPD reporting units included the annual operating plan and forecasted operating results, successful execution of our current realignment programs and identified strategic initiatives, a constant cost of capital, a short-term stabilization and mid to long-term improvement of the macro-economic conditions of the oil and gas market, and a relatively stable global gross domestic product.
Although we have concluded that there is no impairment on the goodwill associated with our EPO and IPD reporting units as of December 31, 2016, we will continue to closely monitor their performance and related market conditions for future indicators of potential impairment and reassess accordingly.
We also consider our market capitalization in our evaluation of the fair value of our goodwill.
Our market capitalization increased as compared with 2015 and did not indicate a potential impairment of our goodwill as of December 31, 2016.
Impairment losses for indefinite-lived intangible assets are recognized whenever the estimated fair value is less than the carrying value. Fair values are calculated for trademarks using a "relief from royalty" method, which estimates the fair value of a trademark by determining the present value of estimated royalty payments that are avoided as a result of owning the trademark. This method includes judgmental assumptions about sales growth and discount rates that have a significant
impact on the fair value and are substantially consistent with the assumptions used to determine the fair value of our reporting units discussed above.
We did not record a material impairment of our trademarks
in
2016
,
2015
or
2014
.
The recoverable value of other long-lived assets, including property, plant and equipment and finite-lived intangible assets, is reviewed when indicators of potential impairments are present. The recoverable value is based upon an assessment of the estimated future cash flows related to those assets, utilizing assumptions similar to those for goodwill. Additional considerations related to our long-lived assets include expected maintenance and improvements, changes in expected uses and ongoing operating performance and utilization.
Deferred Loan Costs
— Deferred loan costs, consisting of fees and other expenses associated with debt financing, are amortized over the term of the associated debt using the effective interest method. Additional amortization is recorded in periods where optional prepayments on debt are made.
Fair Values of Financial Instruments
— Our financial instruments are presented at fair value in our consolidated balance sheets, with the exception of our long-term debt. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models may be applied.
Assets and liabilities recorded at fair value in our consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair values. Hierarchical levels, as defined by Accounting Standards Codification ("ASC") 820, "Fair Value Measurements and Disclosures," are directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities. An asset or a liability’s categorization within the fair value hierarchy is based on the lowest level of significant input to its valuation. Hierarchical levels are as follows:
Level I — Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.
Level II — Inputs (other than quoted prices included in Level I) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.
Level III — Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.
Recurring fair value measurements are limited to investments in derivative instruments and certain equity securities. The fair value measurements of our derivative instruments are determined using models that maximize the use of the observable market inputs including interest rate curves and both forward and spot prices for currencies, and are classified as Level II under the fair value hierarchy. The fair values of our derivative instruments are included in Note 7. The fair value measurements of our investments in equity securities are determined using quoted market prices and are classified as Level I. The fair values of our investments in equity securities, and changes thereto, are immaterial to our consolidated financial position and results of operations.
Derivatives and Hedging Activities
— We have a foreign currency derivatives and hedging policy outlining the conditions under which we can enter into financial derivative transactions. We do not use derivative instruments for trading or speculative purposes. All derivative instruments are recognized on the balance sheet at their fair values. The accounting for gains and losses resulting from changes in fair value depends on whether the derivative is designated and qualifies for hedge accounting.
Foreign Exchange Contracts —We employ a foreign currency economic hedging strategy to mitigate certain financial risks resulting from foreign currency exchange rate movements that impact foreign currency denominated receivables and payables, firm committed transactions and forecasted sales and purchases. In 2013 we began to designate certain forward exchange contracts as hedging instruments and apply hedge accounting to those instruments.
For designated forward exchange contracts, the changes in fair value are recorded in other comprehensive loss until the underlying hedged item affects earnings, at which time the change in fair value is recognized in sales in the consolidated statements of income. For non-designated forward exchange contracts, the changes in the fair values are
recognized immediately in o
ther income (expense), net
in the consolidated statements of income. See Note 6 for further discussion of forward exchange contracts.
We discontinue hedge accounting when (1) we deem the hedge to be ineffective and determine that the designation of the derivative as a hedging instrument is no longer appropriate; (2) the derivative matures, terminates or is sold; or (3) occurrence of the contracted or committed transaction is no longer probable or will not occur in the originally expected period.
When hedge accounting is discontinued and the derivative remains outstanding, we carry the derivative at its estimated fair value on the balance sheet, recognizing changes in the fair value in current period earnings. If a cash flow hedge becomes ineffective, any deferred gains or losses remain in accumulated other comprehensive loss until the underlying hedged item is recognized. If it becomes probable that a hedged forecasted transaction will not occur, deferred gains or losses on the hedging instrument are recognized in earnings immediately.
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 expect all counterparties to meet their obligations. If necessary, we would adjust the values of our derivative contracts for our or our counterparties’ credit risks.
Foreign Currency Translation
— Assets and liabilities of our foreign subsidiaries are translated to U.S. dollars at exchange rates prevailing at the balance sheet date, while income and expenses are translated at average rates for each month. Translation gains and losses are reported as a component of accumulated other comprehensive loss. Transactional currency gains and losses arising from transactions in currencies other than our sites’ functional currencies are included in our consolidated results of operations.
Transaction and translation gains and losses arising from intercompany balances are reported as a component of accumulated other comprehensive loss when the underlying transaction stems from a long-term equity investment or from debt designated as not due in the foreseeable future. Otherwise, we recognize transaction gains and losses arising from intercompany transactions as a component of income. Where intercompany balances are not long-term investment related or not designated as due beyond the foreseeable future, we may mitigate risk associated with foreign currency fluctuations by entering into forward exchange contracts.
Stock-Based Compensation
— Stock-based compensation is measured at the grant-date fair value. The exercise price of stock option awards and the value of restricted share, restricted share unit and performance-based unit awards (collectively referred to as "Restricted Shares") are set at the closing price of our common stock on the New York Stock Exchange on the date of grant, which is the date such grants are authorized by our Board of Directors. Restricted share units and performance-based units refer to restricted awards that do not have voting rights and accrue dividends, which are forfeited if vesting does not occur.
The intrinsic value of Restricted Shares, which is typically the product of share price at the date of grant and the number of Restricted Shares granted, is amortized on a straight-line basis to compensation expense over the periods in which the restrictions lapse based on the expected number of shares that will vest. The forfeiture rate is based on unvested Restricted Shares forfeited compared with original total Restricted Shares granted over a
3
-year period, excluding significant forfeiture events that are not expected to recur.
Earnings Per Share
— We use the two-class method of calculating Earnings Per Share ("EPS"), which determines earnings per share for each class of common stock and participating security as if all earnings for the period had been distributed. Unvested restricted share awards that earn non-forfeitable dividend rights qualify as participating securities and, accordingly, are included in the basic computation as such. Our unvested restricted shares participate on an equal basis with common shares; therefore, there is no difference in undistributed earnings allocated to each participating security. Accordingly, the presentation below is prepared on a combined basis and is presented as earnings per common share. The following is a reconciliation of net earnings of Flowserve Corporation and weighted average shares for calculating basic net earnings per common share.
Earnings per weighted average common share outstanding was calculated as follows:
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Year Ended December 31,
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2016
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2015
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2014
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(Amounts in thousands, except per share data)
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Net earnings of Flowserve Corporation
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$
|
132,455
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|
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$
|
258,411
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$
|
513,372
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Dividends on restricted shares not expected to vest
|
6
|
|
|
12
|
|
|
12
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Earnings attributable to common and participating shareholders
|
$
|
132,461
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$
|
258,423
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$
|
513,384
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Weighted average shares:
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Common stock
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130,147
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132,567
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136,334
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Participating securities
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285
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507
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578
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Denominator for basic earnings per common share
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130,432
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133,074
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136,912
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Effect of potentially dilutive securities
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543
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737
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931
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Denominator for diluted earnings per common share
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130,975
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133,811
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137,843
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Net earnings per share attributable to Flowserve Corporation common shareholders:
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Basic
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$
|
1.02
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$
|
1.94
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$
|
3.75
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Diluted
|
1.01
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|
1.93
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3.72
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Diluted earnings per share 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, restricted share units and performance share units.
Research and Development Expense
— Research and development costs are charged to expense when incurred. Aggregate research and development costs included in selling, general and administrative expenses ("SG&A") were
$42.8 million
,
$45.9 million
and
$40.9 million
in
2016
,
2015
and
2014
, respectively. Costs incurred for research and development primarily include salaries and benefits and consumable supplies, as well as rent, professional fees, utilities and the depreciation of property and equipment used in research and development activities.
Accounting Developments
Pronouncements Implemented
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. Our adoption of ASU No. 2014-12 effective January 1, 2016 did not have an 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 did not have an impact on our consolidated financial condition and results of operations.
In November 2014, the FASB issued ASU No. 2014-16, "Derivatives and Hedging (Topic 815): "Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity." This ASU was issued to clarify and reinforce the practice of evaluating all relevant terms and features when reviewing the nature of a host contract. Our adoption of ASU No. 2014-16 effective January 1, 2016 did not have an impact on our consolidated financial condition and results of operations.
In January 2015, the FASB issued ASU No. 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 accounting principles generally accepted in the U.S. (“U.S. GAAP”). Our adoption of ASU No. 2015-01 effective January 1, 2016 did not 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. Our adoption of ASU No. 2015-02 effective January 1, 2016 did not have an impact 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 ASU requires companies to present debt issuance costs in the same manner that 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. In August 2015, the FASB issued ASU 2015-15, "Interest - Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements-Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting (SEC Update)." In this ASU the SEC staff announced that it would "not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement." We adopted the provisions of ASU 2015-03 and ASU 2015-15 as of January 1, 2016. Prior period amounts have been reclassified to conform to the current period presentation. As of December 31, 2015,
$10.3 million
of debt issuance costs were reclassified in our consolidated balance sheet from other assets, net to long-term debt. Our adoption of ASU No. 2015-03 and ASU No. 2015-15 effective January 1, 2016 did not have an impact on our consolidated 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. Our adoption of ASU No. 2015-07 effective January 1, 2016 did not have an impact on our consolidated financial condition and results of operations.
In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes to simplify the presentation of deferred income taxes. The ASU requires that deferred tax liabilities and assets be classified as noncurrent on the balance sheet. We adopted ASU No. 2015-17 effective January 1, 2016 and as a result, prior period amounts have been reclassified to conform to the current period presentation. As of December 31, 2015,
$156.0 million
of current deferred tax assets and
$11.4 million
of current deferred tax liabilities were reclassified from current with an increase of
$43.1 million
in noncurrent deferred tax assets and a decrease of
$101.5 million
in noncurrent deferred tax liabilities on our balance sheet. Our adoption of ASU No. 2015-17 effective January 1, 2016 did not have an impact on our consolidated results of operations.
In March 2016, the FASB issued ASU No. 2016-09, "Compensation - Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting." The ASU affects the accounting for employee share-based payment transactions as it relates to accounting for income taxes, accounting for forfeitures, and statutory tax withholding requirements.We adopted the provisions of ASU 2016-09 as of January 1, 2017. This ASU is effective for annual periods beginning after December 15, 2016, including interim periods within those fiscal years with early adoption permitted. This adoption
resulted in retrospective adjustments to the classification of specific items in our statement of cash flows that are reflected in this Form 10-K/A. Specifically, we reclassified cash outflows for employee taxes paid from operating to financing and elected to reclassify the cash impacts due to excess tax deficiencies and benefits from financing to operating, which resulted in a net reclassification of cash flows used from operating to financing of approximately
$12.9 million
,
$22.7 million
and
$24.3 million
for the years ended
December 31, 2016
,
December 31, 2015
and
December 31, 2014
, respectively.
Pronouncements Not Yet Implemented
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)" which supersedes most of the revenue recognition requirements in "Revenue Recognition (Topic 605)." The standard is principle-based and provides a five-step model to determine when and how revenue is recognized. The core principle is that a company should
recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. Companies are permitted to adopt the new standard using one of two transition methods. Under the full retrospective method, the requirements of the new standard are applied to contracts for each prior reporting period presented and the cumulative effect of applying the standard is recognized in the earliest period presented. Under the modified retrospective method the requirements of the new standard are applied to contracts that are open as of January 1, 2018, the required date of adoption and the cumulative effect of applying the standard is recognized as an adjustment to beginning retained earnings in that same year. The standard also includes significantly expanded disclosure requirements for revenue. Since 2014, the FASB has issued several updates to Topic 606.
We are currently evaluating the impact of ASU No. 2014-09 and all related ASU's on our consolidated financial condition and results of operations. We plan to adopt the new revenue guidance effective January 1, 2018 using the modified retrospective method for transition. In 2015, we established a cross-functional implementation team consisting of representatives from across all of our reportable segments to begin the process of analyzing the impact of the standard on our contracts. The preliminary results of our evaluation, which is still in process, indicate that one of the changes upon adoption may be potentially increased “over-time” revenue recognition. Currently, revenue recognized under the percentage of completion method is less than
5%
of our consolidated sales. We also anticipate changes to the consolidated balance sheet related to accounts receivable, contract assets and contract liabilities. Additionally, we are in the process of evaluating and designing the necessary changes to our business processes, systems and controls to support recognition and disclosure under the new standard. We are continuing our evaluation to determine the impact on our consolidated financial condition and results of operations.
In July 2015, the FASB issued ASU No. 2015-11, "Inventory (Topic 330): Simplifying the Measurement of Inventory." The ASU updates represent changes to simplify the subsequent measurement of inventory. Previous to the issuance of this ASU, ASC 330 required that an entity measure inventory at the lower of cost or market. The amendments of ASU 2015-11 update narrows that “market” requirement to “net realizable value,” which is defined by the ASU as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This ASU is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2016. Application of this ASU is to be made prospectively and early application is permitted as of the beginning of an interim or annual reporting period. The adoption of ASU No. 2015-11 is not expected to have a material impact on our consolidated financial condition and results of operations.
In January 2016, the FASB issued ASU No. 2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities." The ASU requires entities to measure equity investments that do not result in consolidation and are not accounted for under the equity method at fair value with changes in fair value recognized in net income. The ASU also requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. The requirement to disclose the method(s) and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost on the balance sheet has been eliminated by this ASU. This ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. We are currently evaluating the impact of ASU No. 2016-01 on our consolidated financial condition and results of operations.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)”. The ASU requires that organizations that lease assets recognize assets and liabilities on the balance sheet for the rights and obligations created by those leases. The ASU will affect the presentation of lease related expenses on the income statement and statement of cash flows and will increase the required disclosures related to leases. This ASU is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years with early adoption permitted. We are currently evaluating the impact of ASU No. 2016-02 on our consolidated financial condition and results of operations. Although we are continuing to evaluate, upon initial qualitative evaluation, we believe a key change upon adoption will be the balance sheet recognition of leased assets and liabilities. Based on our qualitative evaluation to date, we believe that any changes in income statement recognition will not be material.
In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments." The amendments in this ASU replace the current incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This ASU is effective for fiscal years beginning after December
15, 2019, including interim periods within those fiscal years. We are currently evaluating the impact of ASU No. 2016-13 on our consolidated financial condition and results of operations.
In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments - A consensus of the FASB Emerging Issues Task Force.” The update was issued with the objective of reducing the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230 and other topics. This ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. We are currently evaluating the impact of ASU No. 2016-15 on our consolidated financial condition and results of operations.
In October 2016, the FASB issued ASU No. 2016-16, "Income Taxes (Topic 740) Intra-Entity Transfers of Assets Other Than Inventory." The ASU guidance requires the recognition of the income tax consequences of an intercompany asset transfer, other than transfers of inventory, when the transfer occurs. For intercompany transfers of inventory, the income tax effects will continue to be deferred until the inventory has been sold to a third party. The ASU is effective for reporting periods beginning after December 15, 2017, with early adoption permitted. We are currently evaluating the impact of ASU No. 2016-16 on our consolidated financial condition and results of operations.
In October 2016, the FASB issued ASU No. 2016-17, "Consolidation (Topic 810): Interests Held through Related Parties That Are Under Common Control." The amendments in this ASU affect the consolidation guidance regarding how a reporting entity that is the single decision maker of variable interest entity ("VIE") should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of the VIE. The ASU is effective for reporting periods beginning after December 15, 2016, including interim periods with those fiscal years. The adoption of ASU No. 2016-17 is not expected to have a material impact on our consolidated financial condition and results of operations.
In November 2016, the FASB issued ASU No. 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash." The amendments in this ASU require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The ASU is effective for reporting periods beginning after December 15, 2017, including interim periods with those fiscal years. The adoption of ASU No. 2016-18 is not expected to have a material impact on our consolidated financial condition and results of operations.
In December 2016, the FASB issued ASU No. 2016-19, “Technical Corrections and Improvements.” The ASU makes minor changes to several topics in the FASB Accounting Standards Codification for U.S. GAAP. The amendments of the ASU require transition guidance that are effective for annual and interim reporting periods beginning after December 15, 2016. Early adoption is permitted for the amendments that require transition guidance. All other amendments were effective immediately. We are currently evaluating the impact of ASU No. 2016- 19 on our consolidated financial condition and results of operations.
In January 2017, the FASB issued ASU No. 2017-01, "Business Combinations (Topic 805): "Clarifying the Definition of a Business." The ASU clarifies the definition of a business and provides guidance on evaluating as to whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition clarification as outlined in this ASU affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The amendments of the ASU are effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. We are currently evaluating the impact of ASU No. 2017- 01 on our consolidated financial condition and results of operations.
In January 2017, the FASB issued ASU No. 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment." The amendments in this ASU allow companies to apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit’s carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The amendments of the ASU are effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We are currently evaluating the impact of ASU No. 2017- 04 on our consolidated financial condition and results of operations.
|
|
2.
|
REVISION TO PREVIOUSLY REPORTED FINANCIAL INFORMATION
|
In the second quarter of 2017, we identified accounting errors focused mainly at two of our non-U.S. sites in the inventory, accounts receivable, cost of sales and selling, general and administrative expense balances for prior periods through the first quarter of 2017.
We have assessed these errors, individually and in the aggregate, and concluded that they are not material to any prior annual or interim period. However, to facilitate comparisons among periods we have revised our previously issued audited consolidated financial information for the fiscal years ended December 31, 2014, 2015 and 2016 and unaudited condensed consolidated financial information for the interim periods of 2016 and the three months ended March 31, 2017. We also corrected the timing of immaterial previously recorded out-of-period adjustments and reflected them in the revised prior period financial statements, where applicable. Prior periods not presented herein will be revised, as applicable, in future filings.
The following table presents the effect of the prior period revisions on the affected line items of our consolidated balance sheet as of
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
(Amounts in thousands)
|
As Reported
|
|
Adjustments
|
|
As Revised
|
Accounts receivable, net (1)
|
894,749
|
|
|
(12,111
|
)
|
|
882,638
|
|
Inventories, net (2)
|
919,251
|
|
|
(21,561
|
)
|
|
897,690
|
|
Total current assets
|
2,331,361
|
|
|
(33,672
|
)
|
|
2,297,689
|
|
Property, plant and equipment, net
|
723,628
|
|
|
1,177
|
|
|
724,805
|
|
Deferred taxes (3)
|
87,178
|
|
|
(3,456
|
)
|
|
83,722
|
|
Other assets, net
|
181,014
|
|
|
2,112
|
|
|
183,126
|
|
Total assets
|
$
|
4,742,762
|
|
|
$
|
(33,839
|
)
|
|
$
|
4,708,923
|
|
Accrued liabilities
|
680,689
|
|
|
297
|
|
|
680,986
|
|
Total current liabilities
|
1,178,141
|
|
|
297
|
|
|
1,178,438
|
|
Retirement obligations and other liabilities
|
410,168
|
|
|
(2,329
|
)
|
|
407,839
|
|
Retained earnings (4)
|
3,632,163
|
|
|
(33,767
|
)
|
|
3,598,396
|
|
Accumulated other comprehensive loss
|
(626,748
|
)
|
|
1,960
|
|
|
(624,788
|
)
|
Total Flowserve Corporation shareholders’ equity
|
1,648,234
|
|
|
(31,807
|
)
|
|
1,616,427
|
|
Total equity
|
1,669,195
|
|
|
(31,807
|
)
|
|
1,637,388
|
|
Total liabilities and equity
|
$
|
4,742,762
|
|
|
$
|
(33,839
|
)
|
|
$
|
4,708,923
|
|
_______________________________________
(1) The adjustments to accounts receivable, net are primarily related to receivables at
one
non-U.S. manufacturing site of
$(9.5) million
from our primary Venezuelan customer. These receivables should have been classified as long-term receivables and included in the charge that we recorded in the third quarter of
2016
to fully reserve all the potentially uncollectible receivables. This adjustment related to our EPD segment.
(2) The inventory adjustments primarily include corrections of errors at
one
non-U.S. manufacturing site related to inventory manufacturing cost variances of
$(5.9) million
, excess and obsolete reserve of
$(2.5) million
, inappropriate costs capitalized to projects in process of
$(8.3) million
and the write-off of non-recoverable work in process of
$(3.3) million
. The inventory manufacturing cost variances are capitalized to reflect inventory balances at actual cost, however, the non-U.S. site inappropriately overstated the costs subject to capitalization, primarily during
2016
. The excess and obsolete reserve did not consider all inventory items resulting in an understatement of the reserve. The inappropriate costs were attributable to multiple projects over multiple periods for which no costs had been incurred or for which costs were incurred for warranty items that should have been expensed. The non-recoverable work in process related to projects which had previously shipped but the related costs were not appropriately removed from inventory. These adjustments were attributable to our IPD segment other than
$(3.6) million
of the inappropriate capitalized cost and
$(2.8) million
of write-off of non-recoverable work in progress that were attributable to our EPD segment.
(3) The deferred tax asset adjustments primarily related to deferred tax assets of
$(6.4) million
that previously were determined to be more likely than not realizable, partially offset by the deferred tax effect of other revision adjustments. However, as a result of the adjustments described above, it was determined the deferred tax assets would not be realized.
(4) The adjustment to retained earnings represents the cumulative effect of the errors that were corrected in the current and prior periods.
The following table presents the effect of the prior period revisions on the affected line items of our consolidated balance sheet as of
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
(Amounts in thousands)
|
As Reported
|
|
Adjustments
|
|
As Revised
|
Accounts receivable, net
|
988,391
|
|
|
(2,619
|
)
|
|
985,772
|
|
Inventories, net (1)
|
995,565
|
|
|
(16,924
|
)
|
|
978,641
|
|
Prepaid expenses and other
|
125,410
|
|
|
1,055
|
|
|
126,465
|
|
Total current assets
|
2,475,810
|
|
|
(18,488
|
)
|
|
2,457,322
|
|
Deferred taxes
|
69,327
|
|
|
937
|
|
|
70,264
|
|
Total assets
|
$
|
4,980,657
|
|
|
$
|
(17,551
|
)
|
|
$
|
4,963,106
|
|
Accrued liabilities
|
796,764
|
|
|
1,800
|
|
|
798,564
|
|
Total current liabilities
|
1,348,576
|
|
|
1,800
|
|
|
1,350,376
|
|
Retained earnings (2)
|
3,587,120
|
|
|
(21,162
|
)
|
|
3,565,958
|
|
Accumulated other comprehensive loss
|
(540,043
|
)
|
|
1,811
|
|
|
(538,232
|
)
|
Total Flowserve Corporation shareholders’ equity
|
1,666,477
|
|
|
(19,351
|
)
|
|
1,647,126
|
|
Total equity
|
1,683,733
|
|
|
(19,351
|
)
|
|
1,664,382
|
|
Total liabilities and equity
|
$
|
4,980,657
|
|
|
$
|
(17,551
|
)
|
|
$
|
4,963,106
|
|
_______________________________________
(1) The inventory adjustments primarily include corrections for errors at
one
non-U.S. manufacturing site related to inventory manufacturing cost variances of
$(2.8) million
, excess and obsolete reserve of
$(2.4) million
and inappropriate costs capitalized to projects in process of
$(2.6) million
. The inventory manufacturing cost variances are capitalized to reflect inventory balances at actual cost, however, the non-U.S. site inappropriately overstated the costs subject to capitalization. The excess and obsolete reserve did not consider all inventory items resulting in an understatement of the reserve. The inappropriate costs were attributable to multiple projects over multiple periods for which no costs had been incurred or for which costs were incurred for warranty items that should have been expensed. Additionally, adjustments of
$(6.3) million
relate to the write-off of non-recoverable work in progress that was attributable to our EPD segment and related to projects which had previously shipped but the related costs were not appropriately removed from inventory.
(2) The adjustment to retained earnings represents the cumulative effect of the errors that were corrected in the current and prior periods.
The following table presents the effect of the prior period revisions on the affected line items of our consolidated statement of income for the year ended
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands, except per share data)
|
Year Ended December 31, 2016
|
|
As Reported
|
|
Adjustments
|
|
As Revised
|
Sales
|
$
|
3,991,462
|
|
|
$
|
(975
|
)
|
|
$
|
3,990,487
|
|
Cost of sales
|
(2,759,908
|
)
|
|
654
|
|
|
(2,759,254
|
)
|
Gross profit
|
1,231,554
|
|
|
(321
|
)
|
|
1,231,233
|
|
Selling, general and administrative expense (1)
|
(965,322
|
)
|
|
(10,872
|
)
|
|
(976,194
|
)
|
Net earnings from affiliates
|
11,223
|
|
|
1,703
|
|
|
12,926
|
|
Operating income
|
277,455
|
|
|
(9,490
|
)
|
|
267,965
|
|
Other (expense) income, net
|
3,301
|
|
|
(1,021
|
)
|
|
2,280
|
|
Earnings before income taxes
|
223,423
|
|
|
(10,511
|
)
|
|
212,912
|
|
Provision for income taxes (2)
|
(75,286
|
)
|
|
(2,094
|
)
|
|
(77,380
|
)
|
Net earnings, including noncontrolling interests
|
148,137
|
|
|
(12,605
|
)
|
|
135,532
|
|
Net earnings attributable to Flowserve Corporation
|
$
|
145,060
|
|
|
$
|
(12,605
|
)
|
|
$
|
132,455
|
|
Net earnings per share attributable to Flowserve Corporation common shareholders:
|
|
|
|
|
|
Basic
|
$
|
1.11
|
|
|
$
|
(0.09
|
)
|
|
$
|
1.02
|
|
Diluted
|
1.11
|
|
|
(0.1
|
)
|
|
1.01
|
|
____________________________________
(1) The selling, general and administrative expense adjustments primarily include amounts related to the matters described in footnote (1) to the
2016
balance sheet table above.
(2) The provision for income taxes adjustments primarily related to recording a valuation allowance on deferred tax assets, see footnote (3) to the balance sheet table above, partially offset by the tax effect of adjustments to earnings before income tax.
The following table presents the effect of the prior period revisions on the affected line items of our consolidated statement of income for the year ended
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands, except per share data)
|
Year Ended December 31, 2015
|
|
As Reported
|
|
Adjustments
|
|
As Revised
|
Sales (1)
|
$
|
4,561,030
|
|
|
$
|
(3,239
|
)
|
|
$
|
4,557,791
|
|
Cost of sales (1)
|
(3,073,712
|
)
|
|
(6,542
|
)
|
|
(3,080,254
|
)
|
Gross profit
|
1,487,318
|
|
|
(9,781
|
)
|
|
1,477,537
|
|
Selling, general and administrative expense
|
(971,611
|
)
|
|
(1,122
|
)
|
|
(972,733
|
)
|
Operating income
|
525,568
|
|
|
(10,903
|
)
|
|
514,665
|
|
Other expense, net
|
(40,167
|
)
|
|
1,074
|
|
|
(39,093
|
)
|
Earnings before income taxes
|
422,196
|
|
|
(9,829
|
)
|
|
412,367
|
|
Provision for income taxes
|
(148,922
|
)
|
|
571
|
|
|
(148,351
|
)
|
Net earnings, including noncontrolling interests
|
273,274
|
|
|
(9,258
|
)
|
|
264,016
|
|
Net earnings attributable to Flowserve Corporation
|
$
|
267,669
|
|
|
$
|
(9,258
|
)
|
|
$
|
258,411
|
|
Net earnings per share attributable to Flowserve Corporation common shareholders:
|
|
|
|
|
|
|
|
Basic
|
$
|
2.01
|
|
|
$
|
(0.07
|
)
|
|
$
|
1.94
|
|
Diluted
|
2.00
|
|
|
(0.07
|
)
|
|
1.93
|
|
____________________________________
(1) The sales and cost of sales adjustments primarily relate to inappropriate costs capitalized to percentage of completion projects in process in inventory described in footnote (1) to the
2015
balance sheet table above.
The following table presents the effect of the prior period revisions on the affected line items of our consolidated statement of income for the year ended
December 31, 2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands, except per share data)
|
Year Ended December 31, 2014
|
|
As Reported
|
|
Adjustments
|
|
As Revised
|
Cost of sales (1)
|
(3,163,268
|
)
|
|
(4,446
|
)
|
|
(3,167,714
|
)
|
Gross profit
|
1,714,617
|
|
|
(4,446
|
)
|
|
1,710,171
|
|
Operating income
|
789,832
|
|
|
(4,446
|
)
|
|
785,386
|
|
Earnings before income taxes
|
733,190
|
|
|
(4,446
|
)
|
|
728,744
|
|
Provision for income taxes
|
(208,305
|
)
|
|
(1,006
|
)
|
|
(209,311
|
)
|
Net earnings, including noncontrolling interests
|
524,885
|
|
|
(5,452
|
)
|
|
519,433
|
|
Net earnings attributable to Flowserve Corporation
|
$
|
518,824
|
|
|
$
|
(5,452
|
)
|
|
$
|
513,372
|
|
Net earnings per share attributable to Flowserve Corporation common shareholders:
|
|
|
|
|
|
|
|
Basic
|
$
|
3.79
|
|
|
$
|
(0.04
|
)
|
|
$
|
3.75
|
|
Diluted
|
3.76
|
|
|
(0.04
|
)
|
|
3.72
|
|
____________________________________
(1) The cost of sales adjustments primarily relate to
$(7.1) million
of inventory manufacturing cost variances and excess and obsolete reserves (see further discussion in note (1) above) offset by
$3.6 million
for items that were recorded in
2014
as out of period adjustments but that have now been pushed back to prior years as a part of the revision.
The effect of the prior period revisions on the consolidated statements of cash flows was not material to cash flows from operating activities, investing activities or financing activities. The effect was limited primarily to the change in net earnings presented above for the years ended
December 31, 2016
,
2015
and
2014
, respectively, as well as the changes in inventory, accounts receivable and deferred tax movements for those years. Additionally, we adopted ASU 2016-09 on January 1, 2017, see Note 1 for further discussion of the impact of that adoption on our statements of cash flows.
The impacts of the revisions have been reflected throughout the financial statements, including the applicable footnotes, as appropriate.
|
|
3.
|
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 (as defined and discussed in Note 11), which was subsequently paid down with a portion of the net proceeds from our March 2015 offering of the 2022 EUR Senior Notes (as defined and discussed in Note 11). SIHI, based in The Netherlands, had operations primarily in Europe and, to a lesser extent, the Americas and Asia.
The allocation of the purchase price is summarized below:
|
|
|
|
|
(Amounts in millions)
|
January 7, 2015
|
Current assets
|
$
|
151.0
|
|
Intangible assets
|
78.6
|
|
Property, plant and equipment
|
94.5
|
|
Long-term deferred tax asset
|
11.7
|
|
Investments in affiliates
|
7.3
|
|
Current liabilities
|
(88.0
|
)
|
Noncurrent liabilities
|
(114.7
|
)
|
Net tangible and intangible assets
|
140.4
|
|
Goodwill
|
201.1
|
|
Purchase price, net of cash acquired of $23.4
|
$
|
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 our 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. Subsequent to January 7, 2015, the revenues and expenses of SIHI have been included in our consolidated statement of income.
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 consolidated statements of income. Net sales related to the Naval business totaled
$8.2 million
in the first quarter of 2014.
|
|
4.
|
GOODWILL AND OTHER INTANGIBLE ASSETS
|
The changes in the carrying amount of goodwill for the years ended December 31,
2016
and
2015
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPD
|
|
IPD
|
|
FCD
|
|
Total
|
|
(Amounts in thousands)
|
Balance as of January 1, 2015
|
$
|
439,740
|
|
|
$
|
164,742
|
|
|
$
|
462,773
|
|
|
$
|
1,067,255
|
|
Acquisition(1)
|
5,253
|
|
|
201,149
|
|
|
—
|
|
|
206,402
|
|
Segment composition change(2)
|
41,072
|
|
|
(41,072
|
)
|
|
—
|
|
|
—
|
|
Currency translation
|
(8,006
|
)
|
|
(23,703
|
)
|
|
(17,962
|
)
|
|
(49,671
|
)
|
Balance as of December 31, 2015
|
$
|
478,059
|
|
|
$
|
301,116
|
|
|
$
|
444,811
|
|
|
$
|
1,223,986
|
|
Currency translation and other
|
(4,228
|
)
|
|
(1,351
|
)
|
|
(13,353
|
)
|
|
(18,932
|
)
|
Balance as of December 31, 2016
|
$
|
473,831
|
|
|
$
|
299,765
|
|
|
$
|
431,458
|
|
|
$
|
1,205,054
|
|
_______________________________________
(1) Goodwill addition is primarily related to the acquisition of SIHI. See Note 3 for additional information.
(2) Movement of goodwill from IPD to EPD due to segment composition change. See Note 17 for additional information.
The following table provides information about our intangible assets for the years ended December 31,
2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
|
Useful
Life
(Years)
|
|
Ending
Gross
Amount
|
|
Accumulated
Amortization
|
|
Ending
Gross
Amount
|
|
Accumulated
Amortization
|
|
(Amounts in thousands, except years)
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Engineering drawings(1)
|
10-22
|
|
$
|
92,135
|
|
|
$
|
(69,881
|
)
|
|
$
|
92,694
|
|
|
$
|
(66,345
|
)
|
Existing customer relationships(2)
|
5-10
|
|
78,610
|
|
|
(31,671
|
)
|
|
80,270
|
|
|
(25,747
|
)
|
Patents
|
9-16
|
|
26,529
|
|
|
(25,318
|
)
|
|
27,277
|
|
|
(25,242
|
)
|
Other
|
4-40
|
|
83,171
|
|
|
(30,949
|
)
|
|
80,305
|
|
|
(28,092
|
)
|
|
|
|
$
|
280,445
|
|
|
$
|
(157,819
|
)
|
|
$
|
280,546
|
|
|
$
|
(145,426
|
)
|
Indefinite-lived intangible assets(3)
|
|
|
$
|
93,475
|
|
|
$
|
(1,573
|
)
|
|
$
|
95,220
|
|
|
$
|
(1,563
|
)
|
____________________________________
|
|
(1)
|
Engineering drawings represent the estimated fair value associated with specific acquired product and component schematics.
|
|
|
(2)
|
Existing customer relationships acquired prior to 2011 had a useful life of
five
years.
|
|
|
(3)
|
Accumulated amortization for indefinite-lived intangible assets relates to amounts recorded prior to the implementation date of guidance issued in ASC 350.
|
The following schedule outlines actual amortization expense recognized during
2016
and an estimate of future amortization based upon the finite-lived intangible assets owned at
December 31, 2016
:
|
|
|
|
|
|
Amortization
Expense
|
|
(Amounts in thousands)
|
Actual for year ended December 31, 2016
|
$
|
13,888
|
|
Estimated for year ending December 31, 2017
|
14,562
|
|
Estimated for year ending December 31, 2018
|
14,372
|
|
Estimated for year ending December 31, 2019
|
13,914
|
|
Estimated for year ending December 31, 2020
|
13,679
|
|
Estimated for year ending December 31, 2021
|
14,712
|
|
Thereafter
|
51,386
|
|
Amortization expense for finite-lived intangible assets was
$22.0 million
in
2015
and
$14.0 million
in
2014
.
Inventories, net consisted of the following:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
|
(Amounts in thousands)
|
Raw materials
|
$
|
348,012
|
|
|
$
|
390,998
|
|
Work in process
|
629,766
|
|
|
738,688
|
|
Finished goods
|
206,086
|
|
|
221,335
|
|
Less: Progress billings
|
(216,783
|
)
|
|
(285,582
|
)
|
Less: Excess and obsolete reserve
|
(69,391
|
)
|
|
(86,798
|
)
|
Inventories, net
|
$
|
897,690
|
|
|
$
|
978,641
|
|
During
2016
,
2015
and
2014
, we recognized expenses of
$14.6 million
,
$20.2 million
and
$17.9 million
, respectively, for excess and obsolete inventory. These expenses are included in cost of sales ("COS") in our consolidated statements of income.
|
|
6.
|
STOCK-BASED COMPENSATION PLANS
|
We maintain the Flowserve Corporation Equity and Incentive Compensation Plan (the "2010 Plan"), which is a shareholder-approved plan authorizing the issuance of up to
8,700,000
shares of our common stock in the form of incentive stock options, non-statutory stock options, restricted shares, restricted share units and performance-based units (collectively referred to as "Restricted Shares"), stock appreciation rights and bonus stock. Of the
8,700,000
shares of common stock authorized under the 2010 Plan,
3,240,638
were available for issuance as of
December 31, 2016
. The long-term incentive program was amended to allow Restricted Shares granted after January 1, 2016 to employees who retire and have achieved at least
55 years
of age and
ten years
of service to continue to vest over the original vesting period.
No
stock options have been granted since 2006.
Stock Options
— Options granted to officers, other employees and directors allow for the purchase of common shares at the market value of our stock on the date the options are granted. Options generally become exercisable over a staggered period ranging from
one
to
five years
(most typically from
one
to
three years
). At
December 31, 2016
, all outstanding options were fully vested. Options generally expire
ten years
from the date of the grant or within a short period of time following the termination of employment or cessation of services by an option holder.
No
options were granted during
2016
,
2015
or
2014
. Information related to stock options issued to officers, other employees and directors under all plans is presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
Number of shares under option:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding — beginning of year
|
84,261
|
|
|
$
|
17.42
|
|
|
97,962
|
|
|
$
|
16.61
|
|
|
97,962
|
|
|
$
|
16.61
|
|
Exercised
|
(84,261
|
)
|
|
17.42
|
|
|
(13,701
|
)
|
|
11.66
|
|
|
—
|
|
|
—
|
|
Canceled
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Outstanding — end of year
|
—
|
|
|
$
|
—
|
|
|
84,261
|
|
|
$
|
17.42
|
|
|
97,962
|
|
|
$
|
16.61
|
|
Exercisable — end of year
|
—
|
|
|
$
|
—
|
|
|
84,261
|
|
|
$
|
17.42
|
|
|
97,962
|
|
|
$
|
16.61
|
|
The weighted average remaining contractual life of options outstanding at
December 31, 2015
and
2014
was
one year
and
1.8 years
, respectively. The total intrinsic value of stock options exercised during the year ended
December 31, 2016
was
$2.4 million
and was less than
$1 million
for the same period in both
2015
and
2014
.
No
stock options vested during the years ended
December 31, 2016
,
2015
and
2014
.
Restricted Shares
— Generally, the restrictions on Restricted Shares do not expire for a minimum of
one year
and a maximum of
three years
, and shares are subject to forfeiture during the restriction period. Most typically, Restricted Share grants have staggered vesting periods over
one
to
three years
from grant date. The intrinsic value of the Restricted Shares, which is typically the product of share price at the date of grant and the number of Restricted Shares granted, is amortized on a straight-line basis to compensation expense over the periods in which the restrictions lapse.
Unearned compensation is amortized to compensation expense over the vesting period of the Restricted Shares. As of
December 31, 2016
and
2015
, we had
$15.2 million
and
$30.2 million
, respectively, of unearned compensation cost related to unvested Restricted Shares, which is expected to be recognized over a weighted-average period of approximately
one year
. These amounts will be recognized into net earnings in prospective periods as the awards vest. The total fair value of Restricted Shares vested during the years ended
December 31, 2016
,
2015
and
2014
was
$38.8 million
,
$41.3 million
and
$34.8 million
, respectively.
We recorded stock-based compensation for restricted shares as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
2014
|
|
(Amounts in millions)
|
Stock-based compensation expense
|
$
|
30.2
|
|
|
$
|
34.8
|
|
|
$
|
42.7
|
|
Related income tax benefit
|
(10.4
|
)
|
|
(11.8)
|
|
(14.6)
|
Net stock-based compensation expense
|
$
|
19.8
|
|
|
$
|
23.0
|
|
|
$
|
28.1
|
|
The following table summarizes information regarding Restricted Shares:
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2016
|
|
Shares
|
|
Weighted Average
Grant-Date Fair Value
|
Number of unvested Restricted Shares:
|
|
|
|
|
|
Outstanding — beginning of year
|
1,540,843
|
|
|
$
|
58.14
|
|
Granted
|
634,019
|
|
|
37.27
|
|
Vested
|
(708,831
|
)
|
|
54.72
|
|
Canceled
|
(206,756
|
)
|
|
50.75
|
|
Outstanding — ending of year
|
1,259,275
|
|
|
$
|
50.77
|
|
Unvested Restricted Shares outstanding as of
December 31, 2016
, includes approximately
831,000
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, 2014 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
1,593,000
shares based on performance targets. As of
December 31, 2016
, we estimate vesting of approximately
601,000
shares based on expected achievement of performance targets.
|
|
7.
|
DERIVATIVES AND HEDGING ACTIVITIES
|
Our risk management and foreign currency derivatives and hedging policy specifies the conditions under which we may enter into derivative contracts. See Note 1 for additional information on our purpose for entering into derivatives and our overall risk management strategies. We enter into foreign exchange forward contracts to hedge our cash flow risks associated with transactions denominated in currencies other than the local currency of the operation engaging in the transaction. All designated foreign exchange hedging instruments are highly effective.
In 2013 we elected to designate and apply hedge accounting to certain forward exchange contracts. Foreign exchange contracts designated as hedging instruments had notional values of
$0.6 million
and
$21.0 million
at
December 31, 2016
and
2015
, respectively. Foreign exchange contracts not designated as hedging instruments had notional values of
$393.2 million
and
$376.3 million
at
December 31, 2016
and
2015
, respectively. At
December 31, 2016
, the length of foreign exchange contracts currently in place ranged from
13 days
to
23 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 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:
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
(Amounts in thousands)
|
Current derivative assets
|
$
|
682
|
|
|
$
|
2,364
|
|
Current derivative liabilities
|
6,878
|
|
|
3,196
|
|
Noncurrent derivative liabilities
|
355
|
|
|
441
|
|
Current and noncurrent derivative assets are reported in our consolidated balance sheets in prepaid expenses and other and other assets, net, respectively. Current and noncurrent derivative liabilities are reported in our 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
|
(Amounts in thousands)
|
Gain recognized in income
|
$
|
5,693
|
|
|
$
|
23,900
|
|
|
$
|
8,464
|
|
Gains and losses recognized in our consolidated statements of income for foreign exchange contracts are classified as other income (expense), net.
In March 2015, we designated
€255.7 million
of our
€500.0 million
2022 EUR Senior Notes discussed in Note 11 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 2022 EUR Senior Notes due to remeasurement of the effective portion is reported in accumulated other comprehensive loss on our consolidated balance sheet and the remaining change in the carrying value of the ineffective portion, if any, is recognized in other income (expense), net in our consolidated statements 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 year ended
December 31, 2016
.
|
|
8.
|
FAIR VALUE OF FINANCIAL INSTRUMENTS
|
The fair value of our debt, excluding the Senior Notes (as described in Note 11), was estimated using interest rates on similar debt recently issued by companies with credit metrics similar to ours and is classified as Level II under the fair value hierarchy. The carrying value of our debt is included in Note 11 and, except for the Senior Notes, approximates fair value.
The estimated fair value of the Senior Notes is based on Level I quoted market rates. The estimated fair value of our Senior Notes at
December 31, 2016
was
$1,327.2 million
compared to the carrying value of
$1,313.1 million
. The carrying amounts of our other financial instruments (i.e., cash and cash equivalents, accounts receivable, net and accounts payable) approximated fair value due to their short-term nature at
December 31, 2016
and
December 31, 2015
.
|
|
9.
|
DETAILS OF CERTAIN CONSOLIDATED BALANCE SHEET CAPTIONS
|
The following tables present financial information of certain consolidated balance sheet captions.
Accounts Receivable, net
— Accounts receivable, net were:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
|
(Amounts in thousands)
|
Accounts receivable
|
$
|
934,558
|
|
|
$
|
1,029,707
|
|
Less: allowance for doubtful accounts
|
(51,920
|
)
|
|
(43,935
|
)
|
Accounts receivable, net
|
$
|
882,638
|
|
|
$
|
985,772
|
|
As disclosed in Note 1, we reclassified a portion of our accounts receivable to long-term within other assets, net on our
December 31, 2016
and
2015
consolidated balance sheets of which
100%
has been fully reserved at December 31, 2016.
Property, Plant and Equipment, net
— Property, plant and equipment, net were:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
|
(Amounts in thousands)
|
Land
|
$
|
81,022
|
|
|
$
|
83,475
|
|
Buildings and improvements
|
442,756
|
|
|
430,267
|
|
Machinery, equipment and tooling
|
669,639
|
|
|
690,566
|
|
Software, furniture and fixtures and other
|
413,540
|
|
|
409,333
|
|
Gross property, plant and equipment
|
1,606,957
|
|
|
1,613,641
|
|
Less: accumulated depreciation
|
(882,152
|
)
|
|
(855,214
|
)
|
Property, plant and equipment, net
|
$
|
724,805
|
|
|
$
|
758,427
|
|
Accrued Liabilities
— Accrued liabilities were:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
|
(Amounts in thousands)
|
Wages, compensation and other benefits
|
$
|
148,481
|
|
|
$
|
161,800
|
|
Commissions and royalties
|
27,767
|
|
|
30,574
|
|
Customer advance payments
|
253,325
|
|
|
315,510
|
|
Progress billings in excess of accumulated costs
|
7,052
|
|
|
8,085
|
|
Warranty costs and late delivery penalties
|
48,946
|
|
|
51,894
|
|
Sales and use tax
|
14,969
|
|
|
18,110
|
|
Income tax
|
15,755
|
|
|
38,747
|
|
Other
|
164,691
|
|
|
173,844
|
|
Accrued liabilities
|
$
|
680,986
|
|
|
$
|
798,564
|
|
"Other" accrued liabilities include professional fees, lease obligations, insurance, interest, freight, accrued cash dividends payable, legal and environmental matters, derivative liabilities, restructuring reserves and other items, none of which individually exceed
5%
of current liabilities.
Retirement Obligations and Other Liabilities
— Retirement obligations and other liabilities were:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
|
(Amounts in thousands)
|
Pension and postretirement benefits
|
$
|
216,772
|
|
|
$
|
203,150
|
|
Deferred taxes(1)
|
20,086
|
|
|
39,081
|
|
Legal and environmental
|
32,546
|
|
|
26,538
|
|
Uncertain tax positions and other tax liabilities
|
93,524
|
|
|
73,459
|
|
Other
|
44,911
|
|
|
45,558
|
|
Retirement obligations and other liabilities
|
$
|
407,839
|
|
|
$
|
387,786
|
|
__________________________
(1) Prior period was retrospectively adjusted to reflect the adoption of ASU No. 2015-17, "Balance Sheet Classification of Deferred Taxes."
|
|
10.
|
EQUITY METHOD INVESTMENTS
|
We occasionally enter into joint venture arrangements with local country partners as our preferred means of entry into countries where barriers to entry may exist. Similar to our consolidated subsidiaries, these unconsolidated joint ventures generally operate within our primary businesses of designing, manufacturing, assembling and distributing fluid motion and control products and services. We have agreements with certain of these joint ventures that restrict us from otherwise entering the respective market and certain joint ventures produce and/or sell our products as part of their broader product offering. Net earnings from investments in unconsolidated joint ventures is reported in net earnings from affiliates in our consolidated statements of income. Given the integrated role of the unconsolidated joint ventures in our business, net earnings from affiliates is presented as a component of operating income.
As of
December 31, 2016
, we had investments in
eight
joint ventures (
one
located in each of Chile, India, Japan, Saudi Arabia, South Korea and the United Arab Emirates and
two
located in China) that were accounted for using the equity method and are immaterial for disclosure purposes.
|
|
11.
|
DEBT AND LEASE OBLIGATIONS
|
Debt, including capital lease obligations, consisted of:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015(1)
|
|
(Amounts in thousands)
|
1.25% EUR Senior Notes due March 17, 2022, net of unamortized discount and debt issuance costs of $5,748 and $7,034 at December 31, 2016 and 2015, respectively
|
$
|
519,902
|
|
|
$
|
535,966
|
|
4.00% USD Senior Notes due November 15, 2023, net of unamortized discount and debt issuance costs of $2,972 and $3,339 at December 31, 2016 and 2015, respectively
|
297,028
|
|
|
296,661
|
|
3.50% USD Senior Notes due September 15, 2022, net of unamortized discount and debt issuance costs of $3,848 and $4,445 at December 31, 2016 and 2015, respectively
|
496,152
|
|
|
495,555
|
|
Term Loan Facility, interest rate of 2.25% and 1.86% at December 31, 2016 and 2015, net of debt issuance costs of $745 and $1,181, respectively
|
224,255
|
|
|
283,819
|
|
Capital lease obligations and other borrowings
|
33,286
|
|
|
8,995
|
|
Debt and capital lease obligations
|
1,570,623
|
|
|
1,620,996
|
|
Less amounts due within one year
|
85,365
|
|
|
60,434
|
|
Total debt due after one year
|
$
|
1,485,258
|
|
|
$
|
1,560,562
|
|
_______________________________________
(1)Prior period information has been updated to conform to presentation requirements as prescribed by ASU No. 2015-03, "Interest - Imputation of Interest (Subtopic 835-30)."
Scheduled maturities of the Senior Credit Facility (as described below), as well as our Senior Notes and other debt, are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term
Loan
|
|
Senior Notes and other debt
|
|
Total
|
|
(Amounts in thousands)
|
2017
|
$
|
60,000
|
|
|
$
|
25,365
|
|
|
$
|
85,365
|
|
2018
|
59,430
|
|
|
7,921
|
|
|
67,351
|
|
2019
|
59,864
|
|
|
—
|
|
|
59,864
|
|
2020
|
44,961
|
|
|
—
|
|
|
44,961
|
|
2021
|
—
|
|
|
—
|
|
|
—
|
|
Thereafter
|
—
|
|
|
1,313,082
|
|
|
1,313,082
|
|
Total
|
$
|
224,255
|
|
|
$
|
1,346,368
|
|
|
$
|
1,570,623
|
|
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 3 and utilized the remaining portion for other general corporate purposes.
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"). The 2023 Senior Notes bear an interest rate of
4.00%
per year, payable on May 15 and November 15 of each year. The 2023 Senior Notes were priced at
99.532%
of par value, reflecting a discount to the aggregate principal amount.
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"). The 2022 Senior Notes bear an interest rate of
3.50%
per year, payable on March 15 and September 15 of each year. The 2022 Senior Notes were priced at
99.615%
of par value, reflecting a discount to the aggregate principal amount.
We have the right to redeem the 2022 Senior Notes and 2023 Senior Notes at any time prior to June 15, 2022 and August 15, 2023, respectively, in whole or in part, at our option, at a redemption price equal to the greater of: (1)
100%
of the principal amount of the senior notes being redeemed; or (2) the sum of the present values of the remaining scheduled payments of principal and interest in respect of the Senior Notes being redeemed discounted to the redemption date on a semi-annual basis, at the applicable Treasury Rate plus
30
basis points for the 2022 Senior Notes and plus
25
basis points for the 2023 Senior Notes. In addition, at any time on or after June 15, 2022 for the 2022 Senior Notes and August 15, 2023 for the 2023 Senior Notes, we may redeem the Senior Notes at a redemption price equal to
100%
of the principal amount of the Senior Notes being redeemed. In each case, we will also pay the accrued and unpaid interest on the principal amount being redeemed to the redemption date. Similarly, we have the right to redeem the 2022 EUR Senior Notes on or after December 17, 2021, in whole or in part, at our option, at a redemption price equal to the greater of: (1)
100%
of the principal amount of the senior notes being redeemed; or (2) the sum of the present values of the remaining scheduled payments of principal and interest in respect of the Senior Notes being redeemed (exclusive of interest accrued to, but excluding, the date of redemption) discounted to the redemption date on an annual basis, at the Comparable German Government Bond Rate plus
25
basis points.
Senior Credit Facility
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”). On October 14,
2015 we amended our Senior Credit Facility. The amendment extended the maturity of our Senior Credit Facility by
two years
to
October 14, 2020
, lowered the sublimits for the issuance of letters of credit and reduced the commitment fee from
0.175%
to
0.15%
on the daily unused portions of the Senior Credit Facility. The amended Senior Credit Facility also increased the maximum permitted leverage ratio from
3.25
to
3.5
times debt to total Consolidated EBITDA (as defined in the Senior Credit Facility). Pursuant to the terms of the Senior Credit Facility and the indentures governing the Senior Notes, our obligations will no longer carry a conditional guarantee by certain of our
100%
owned domestic subsidiaries. Subject to certain conditions, we have the right to increase the amount of the Term Loan Facility or the Revolving Credit Facility by an aggregate amount not to exceed
$400.0 million
. All other existing terms under the Senior Credit Facility remained unchanged.
As of
December 31, 2016
and
December 31, 2015
, we had
no
revolving loans outstanding under the Revolving Credit Facility. We had outstanding letters of credit of
$102.6 million
and
$105.2 million
at
December 31, 2016
and
December 31, 2015
, respectively. As of
December 31, 2016
, due to a financial covenant in the Senior Credit Facility, the amount available for borrowings under our Revolving Credit Facility was effectively limited to
$553.5 million
. The amount available for borrowings under our Revolving Credit Facility was
$894.8 million
at
December 31, 2015
.
The Senior Credit Facility contains, among other things, covenants defining our and our subsidiaries' ability to dispose of assets, merge, pay dividends, repurchase or redeem capital stock and indebtedness, incur indebtedness and guarantees, create liens, enter into agreements with negative pledge clauses, make certain investments or acquisitions, enter into transactions with affiliates or engage in any business activity other than our existing business. Our compliance with these financial covenants under the Senior Credit Facility is tested quarterly. We were in compliance with the covenants as of
December 31, 2016
.
Repayment of Obligations
—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
0.15%
(per annum) at
December 31, 2016
. We made scheduled principal repayments under our Term Loan Facility of
$60.0 million
,
$45.0 million
and
$40.0 million
in
2016
,
2015
and
2014
, respectively. We have scheduled principal repayments of
$15.0 million
due in each of the next four quarters of
2017
under our Term Loan Facility.
Operating Leases
We have non-cancelable operating leases for certain offices, service and quick response centers, certain manufacturing and operating facilities, machinery, equipment and automobiles. Rental expense relating to operating leases was
$54.7 million
,
$53.1 million
and
$56.2 million
in
2016
,
2015
and
2014
, respectively.
The future minimum lease payments due under non-cancelable operating leases are (amounts in thousands):
|
|
|
|
|
Year Ended December 31,
|
2017
|
$
|
48,640
|
|
2018
|
38,028
|
|
2019
|
29,368
|
|
2020
|
23,385
|
|
2021
|
19,476
|
|
Thereafter
|
65,271
|
|
Total minimum lease payments
|
$
|
224,168
|
|
|
|
12.
|
PENSION AND POSTRETIREMENT BENEFITS
|
We sponsor several noncontributory defined benefit pension plans, covering substantially all U.S. employees and certain non-U.S. employees, which provide benefits based on years of service, age, job grade levels and type of compensation. Retirement benefits for all other covered employees are provided through contributory pension plans, cash balance pension plans and government-sponsored retirement programs. All funded defined benefit pension plans receive funding based on independent actuarial valuations to provide for current service and an amount sufficient to amortize unfunded prior service over periods not to exceed 30 years, with funding falling within the legal limits prescribed by prevailing regulation. We also maintain unfunded defined benefit plans that, as permitted by local regulations, receive funding only when benefits become due.
Our defined benefit plan strategy is to ensure that current and future benefit obligations are adequately funded in a cost-effective manner. Additionally, our investing objective is to achieve the highest level of investment performance that is compatible with our risk tolerance and prudent investment practices. Because of the long-term nature of our defined benefit plan liabilities, our funding strategy is based on a long-term perspective for formulating and implementing investment policies and evaluating their investment performance.
The asset allocation of our defined benefit plans reflect our decision about the proportion of the investment in equity and fixed income securities, and, where appropriate, the various sub-asset classes of each. At least annually, we complete a comprehensive review of our asset allocation policy and the underlying assumptions, which includes our long-term capital markets rate of return assumptions and our risk tolerances relative to our defined benefit plan liabilities.
The expected rates of return on defined benefit plan assets are derived from review of the asset allocation strategy, expected long-term performance of asset classes, risks and other factors adjusted for our specific investment strategy. These rates are impacted by changes in general market conditions, but because they are long-term in nature, short-term market changes do not significantly impact the rates.
Our U.S. defined benefit plan assets consist of a balanced portfolio of primarily U.S. equity and fixed income securities. Our non-U.S. defined benefit plan assets include a significant concentration of United Kingdom ("U.K.") fixed income securities
. We monitor investment allocations and manage plan assets to maintain acceptable levels of risk.
For all periods presented, we used a measurement date of December 31 for each of our U.S. and non-U.S. pension plans and postretirement medical plans.
U.S. Defined Benefit Plans
We maintain qualified and non-qualified defined benefit pension plans in the U.S. The qualified plan provides coverage for substantially all full-time U.S. employees who receive benefits, up to an earnings threshold specified by the U.S. Department of Labor. The non-qualified plans primarily cover a small number of employees including current and former members of senior management, providing them with benefit levels equivalent to other participants, but that are otherwise limited by U.S. Department of Labor rules. The U.S. plans are designed to operate as "cash balance" arrangements, under which the employee has the option to take a lump sum payment at the end of their service. The total accumulated benefit obligation is equivalent to the total projected benefit obligation ("Benefit Obligation").
The following are assumptions related to the U.S. defined benefit pension plans:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Weighted average assumptions used to determine Benefit Obligations:
|
|
|
|
|
|
|
|
|
Discount rate
|
4.00
|
%
|
|
4.75
|
%
|
|
4.00
|
%
|
Rate of increase in compensation levels
|
4.00
|
|
|
4.00
|
|
|
4.25
|
|
Weighted average assumptions used to determine net pension expense:
|
|
|
|
|
|
Long-term rate of return on assets
|
6.00
|
%
|
|
6.25
|
%
|
|
6.00
|
%
|
Discount rate
|
4.75
|
|
|
4.00
|
|
|
4.50
|
|
Rate of increase in compensation levels
|
4.00
|
|
|
4.25
|
|
|
4.25
|
|
At
December 31, 2016
as compared with
December 31, 2015
, we decreased our discount rate from
4.75%
to
4.00%
based on an analysis of publicly-traded investment grade U.S. corporate bonds, which had a lower yield due to current market conditions. In determining
2016
expense, the expected rate of return on U.S. plan assets decreased to
6.00%
, primarily based on our target allocations and expected long-term asset returns. The long-term rate of return assumption is calculated using a quantitative approach that utilizes unadjusted historical returns and asset allocation as inputs for the calculation. For all US plans, we adopted the RP-2006 mortality tables and the MP-2016 improvement scale published in October 2016. We applied the RP-2006 tables based on the constituency of our plan population for union and non-union participants. We adjusted the improvement scale to utilize
75%
of the ultimate improvement rate, consistent with assumptions adopted by the Social Security Administration trustees, based on long-term historical experience. Currently, we believe this approach provides the best estimate of our future obligation. Most plan participants elect to receive plan benefits as a lump sum at the end of service, rather than an annuity. As such, the updated mortality tables had an immaterial effect on our pension obligation.
Net pension expense for the U.S. defined benefit pension plans (including both qualified and non-qualified plans) was:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
|
(Amounts in thousands)
|
Service cost
|
$
|
22,583
|
|
|
$
|
24,113
|
|
|
$
|
22,981
|
|
Interest cost
|
19,072
|
|
|
17,072
|
|
|
17,429
|
|
Expected return on plan assets
|
(23,997
|
)
|
|
(24,185
|
)
|
|
(21,985
|
)
|
Settlement cost
|
91
|
|
|
—
|
|
|
—
|
|
Amortization of unrecognized prior service cost
|
488
|
|
|
509
|
|
|
475
|
|
Amortization of unrecognized net loss
|
4,999
|
|
|
9,178
|
|
|
8,428
|
|
U.S. net pension expense
|
$
|
23,236
|
|
|
$
|
26,687
|
|
|
$
|
27,328
|
|
The estimated prior service cost and the estimated net loss for the U.S. defined benefit pension plans that will be amortized from accumulated other comprehensive loss into pension expense in
2017
is
$0.1 million
and
$6.0 million
, respectively. We amortize estimated prior service benefits and estimated net losses over the remaining expected service period.
The following summarizes the net pension liability for U.S. plans:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
|
(Amounts in thousands)
|
Plan assets, at fair value
|
$
|
418,854
|
|
|
$
|
408,218
|
|
Benefit Obligation
|
(449,601
|
)
|
|
(426,248
|
)
|
Funded status
|
$
|
(30,747
|
)
|
|
$
|
(18,030
|
)
|
The following summarizes amounts recognized in the balance sheet for U.S. plans:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
|
(Amounts in thousands)
|
Current liabilities
|
(273
|
)
|
|
(248
|
)
|
Noncurrent liabilities
|
(30,474
|
)
|
|
(17,782
|
)
|
Funded status
|
$
|
(30,747
|
)
|
|
$
|
(18,030
|
)
|
The following is a summary of the changes in the U.S. defined benefit plans’ pension obligations:
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
(Amounts in thousands)
|
Balance — January 1
|
$
|
426,248
|
|
|
$
|
447,552
|
|
Service cost
|
22,583
|
|
|
24,113
|
|
Interest cost
|
19,072
|
|
|
17,072
|
|
Plan amendments and settlements
|
(3,221
|
)
|
|
—
|
|
Actuarial loss (gain)(1)
|
22,706
|
|
|
(28,052
|
)
|
Benefits paid
|
(37,787
|
)
|
|
(34,437
|
)
|
Balance — December 31
|
$
|
449,601
|
|
|
$
|
426,248
|
|
Accumulated benefit obligations at December 31
|
$
|
449,601
|
|
|
$
|
426,248
|
|
_______________________________________
|
|
(1)
|
The actuarial loss in 2016 and gain in 2015 primarily reflect the impact of changes in the discount rate.
|
The following table summarizes the expected cash benefit payments for the U.S. defined benefit pension plans in the future (amounts in millions):
|
|
|
|
|
2017
|
$
|
38.6
|
|
2018
|
40.1
|
|
2019
|
40.4
|
|
2020
|
40.9
|
|
2021
|
45.4
|
|
2022-2026
|
206.0
|
|
The following table shows the change in accumulated other comprehensive loss attributable to the components of the net cost and the change in Benefit Obligations for U.S. plans, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
(Amounts in thousands)
|
Balance — January 1
|
$
|
(61,647
|
)
|
|
$
|
(66,903
|
)
|
|
$
|
(55,110
|
)
|
Amortization of net loss
|
3,136
|
|
|
5,750
|
|
|
5,277
|
|
Amortization of prior service cost
|
306
|
|
|
318
|
|
|
297
|
|
Net loss arising during the year
|
(11,618
|
)
|
|
(812
|
)
|
|
(17,367
|
)
|
Settlement gain
|
57
|
|
|
—
|
|
|
—
|
|
Prior service cost
|
634
|
|
|
—
|
|
|
—
|
|
Balance — December 31
|
$
|
(69,132
|
)
|
|
$
|
(61,647
|
)
|
|
$
|
(66,903
|
)
|
Amounts recorded in accumulated other comprehensive loss consist of:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
|
(Amounts in thousands)
|
Unrecognized net loss
|
$
|
(68,476
|
)
|
|
$
|
(60,034
|
)
|
Unrecognized prior service cost
|
(656
|
)
|
|
(1,613
|
)
|
Accumulated other comprehensive loss, net of tax
|
$
|
(69,132
|
)
|
|
$
|
(61,647
|
)
|
The following is a reconciliation of the U.S. defined benefit pension plans’ assets:
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
(Amounts in thousands)
|
Balance — January 1
|
$
|
408,218
|
|
|
$
|
426,784
|
|
Return on plan assets
|
28,182
|
|
|
(5,160
|
)
|
Company contributions
|
22,450
|
|
|
21,031
|
|
Benefits paid
|
(37,787
|
)
|
|
(34,437
|
)
|
Settlements
|
(2,209
|
)
|
|
—
|
|
Balance — December 31
|
$
|
418,854
|
|
|
$
|
408,218
|
|
We contributed
$22.5 million
and
$21.0 million
to the U.S. defined benefit pension plans during
2016
and
2015
, respectively. These payments exceeded the minimum funding requirements mandated by the U.S. Department of Labor rules. Our estimated contribution in
2017
is expected to be approximately
$20 million
, excluding direct benefits paid.
All U.S. defined benefit plan assets are held by the qualified plan. The asset allocations for the qualified plan at the end of
2016
and
2015
by asset category, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Target Allocation
at December 31,
|
|
Percentage of Actual Plan Assets at December 31,
|
Asset category
|
2016
|
|
2015
|
|
2016
|
|
2015
|
U.S. Large Cap
|
19
|
%
|
|
19
|
%
|
|
20
|
%
|
|
19
|
%
|
U.S. Small Cap
|
4
|
%
|
|
4
|
%
|
|
4
|
%
|
|
4
|
%
|
International Large Cap
|
14
|
%
|
|
14
|
%
|
|
14
|
%
|
|
14
|
%
|
Emerging Markets
|
5
|
%
|
|
5
|
%
|
|
5
|
%
|
|
5
|
%
|
World Equity
|
8
|
%
|
|
8
|
%
|
|
8
|
%
|
|
8
|
%
|
Equity securities
|
50
|
%
|
|
50
|
%
|
|
51
|
%
|
|
50
|
%
|
Liability Driven Investment
|
40
|
%
|
|
39
|
%
|
|
39
|
%
|
|
39
|
%
|
Long-Term Government / Credit
|
10
|
%
|
|
11
|
%
|
|
10
|
%
|
|
11
|
%
|
Fixed income
|
50
|
%
|
|
50
|
%
|
|
49
|
%
|
|
50
|
%
|
_______________________________________
None of our common stock is directly held by our qualified plan. Our investment strategy is to earn a long-term rate of return consistent with an acceptable degree of risk and minimize our cash contributions over the life of the plan, while taking into account the liquidity needs of the plan. We preserve capital through diversified investments in high quality securities. Our current allocation target is to invest approximately
50%
of plan assets in equity securities and
50%
in fixed income securities. Within each investment category, assets are allocated to various investment strategies. A professional money management firm manages our assets, and we engage a consultant to assist in evaluating these activities. We periodically review the allocation target, generally in conjunction with an asset and liability study and in consideration of our future cash flow needs. We regularly rebalance the actual allocation to our target investment allocation.
Plan assets are invested in commingled funds and the individual funds are actively managed with the intent to outperform specified benchmarks. Our "Pension and Investment Committee" is responsible for setting the investment strategy and the target asset allocation, as well as selecting individual funds. As the qualified plan approached fully funded status, we implemented a Liability-Driven Investing ("LDI") strategy, which more closely aligns the duration of the assets with the duration of the liabilities. The LDI strategy results in an asset portfolio that more closely matches the behavior of the liability, thereby protecting the funded status of the plan.
The plan’s financial instruments, shown below, are presented at fair value. See Note 1 for further discussion on how the hierarchical levels of the fair values of the Plan’s investments are determined. The fair values of our U.S. defined benefit plan assets were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2016
|
|
At December 31, 2015
|
|
|
|
Hierarchical Levels
|
|
|
|
Hierarchical Levels
|
|
Total
|
|
I
|
|
II
|
|
III
|
|
Total
|
|
I
|
|
II
|
|
III
|
|
(Amounts in thousands)
|
|
(Amounts in thousands)
|
Cash and cash equivalents
|
$
|
848
|
|
|
$
|
848
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
31
|
|
|
$
|
31
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Commingled Funds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Large Cap(a)
|
81,953
|
|
|
—
|
|
|
81,953
|
|
|
—
|
|
|
77,765
|
|
|
—
|
|
|
77,765
|
|
|
—
|
|
U.S. Small Cap(b)
|
17,738
|
|
|
—
|
|
|
17,738
|
|
|
—
|
|
|
16,160
|
|
|
—
|
|
|
16,160
|
|
|
—
|
|
International Large Cap(c)
|
59,435
|
|
|
—
|
|
|
59,435
|
|
|
—
|
|
|
57,174
|
|
|
—
|
|
|
57,174
|
|
|
—
|
|
Emerging Markets(d)
|
20,014
|
|
|
—
|
|
|
20,014
|
|
|
—
|
|
|
19,888
|
|
|
—
|
|
|
19,888
|
|
|
—
|
|
World Equity(e)
|
34,261
|
|
|
—
|
|
|
34,261
|
|
|
—
|
|
|
32,680
|
|
|
—
|
|
|
32,680
|
|
|
—
|
|
Fixed income securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability Driven Investment (f)
|
164,384
|
|
|
—
|
|
|
164,384
|
|
|
—
|
|
|
159,900
|
|
|
—
|
|
|
159,900
|
|
|
—
|
|
Long-Term Government/Credit(g)
|
40,221
|
|
|
—
|
|
|
40,221
|
|
|
—
|
|
|
44,620
|
|
|
—
|
|
|
44,620
|
|
|
—
|
|
|
$
|
418,854
|
|
|
$
|
848
|
|
|
$
|
418,006
|
|
|
$
|
—
|
|
|
$
|
408,218
|
|
|
$
|
31
|
|
|
$
|
408,187
|
|
|
$
|
—
|
|
_______________________________________
|
|
(a)
|
U.S. Large Cap funds seek to outperform the Russell 1000 (R) Index with investments in large and medium capitalization U.S. companies represented in the Russell 1000 (R) Index, which is composed of the largest 1,000 U.S. equities as determined by market capitalization.
|
|
|
(b)
|
U.S. Small Cap funds seek to outperform the Russell 2000 (R) Index with investments in medium and small capitalization U.S.
companies represented in the Russell 2000 (R) Index, which is composed of the smallest 2,000 U.S. equities as determined by market capitalization.
|
|
|
(c)
|
International Large Cap funds seek to outperform the MSCI Europe, Australia, and Far East Index with investments in most of the developed nations of the world so as to maintain a high degree of diversification among countries and currencies.
|
|
|
(d)
|
Emerging Markets funds represent a diversified portfolio that seeks high, long-term returns comparable to investments in emerging markets by investing in stocks from newly developed emerging market economies.
|
|
|
(e)
|
World Equity funds seek to outperform the Russell Developed Large Cap Index Net over a full market cycle. The fund's goal is to provide a favorable total return relative to the benchmark, primarily through long-term capital appreciation.
|
|
|
(f)
|
LDI funds seek to outperform the Barclays-Russell LDI Index by investing in high quality, mostly corporate bonds and fixed income securities that closely match those found in discount curves used to value the plan's liabilities.
|
|
|
(g)
|
Long-Term Government/Credit funds seek to outperform the Barclays Capital U.S. Long-Term Government/Credit Index by generating excess return through a variety of diversified strategies in securities with longer durations, such as sector rotation, security selection and tactical use of high-yield bonds.
|
Non-U.S. Defined Benefit Plans
We maintain defined benefit pension plans, which cover some or all of our employees in the following countries: Austria, Belgium, Canada, France, Germany, India, Italy, Mexico, The Netherlands, Sweden, Switzerland and the U.K. The assets in the U.K. (
two
plans), The Netherlands and Canada represent
94%
of the total non-U.S. plan assets ("non-U.S. assets"). Details of other countries’ plan assets have not been provided due to immateriality.
The following are assumptions related to the non-U.S. defined benefit pension plans:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Weighted average assumptions used to determine Benefit Obligations:
|
|
|
|
|
|
|
|
|
Discount rate
|
2.34
|
%
|
|
3.13
|
%
|
|
3.40
|
%
|
Rate of increase in compensation levels
|
3.22
|
|
|
3.61
|
|
|
3.95
|
|
Weighted average assumptions used to determine net pension expense:
|
|
|
|
|
|
Long-term rate of return on assets
|
4.68
|
%
|
|
5.03
|
%
|
|
5.51
|
%
|
Discount rate
|
3.13
|
|
|
3.40
|
|
|
4.22
|
|
Rate of increase in compensation levels
|
3.61
|
|
|
3.95
|
|
|
3.83
|
|
At
December 31, 2016
as compared with
December 31, 2015
, we decreased our average discount rate for non-U.S. plans from
3.13%
to
2.34%
based on analysis of bonds and other publicly-traded instruments, by country, which had lower yields due to market conditions
. To determine
2016
pension expense, we decreased our average expected rate of return on plan assets from
5.03%
at
December 31, 2015
to
4.68%
at
December 31, 2016
,
primarily based on our target allocations and expected long-term asset returns.
As the expected rate of return on plan assets is long-term in nature, short-term market changes do not significantly impact the rate.
Many of our non-U.S. defined benefit plans are unfunded, as permitted by local regulation. The expected long-term rate of return on assets for funded plans was determined by assessing the rates of return for each asset class and is calculated using a quantitative approach that utilizes unadjusted historical returns and asset allocation as inputs for the calculation. We work with our actuaries to determine the reasonableness of our long-term rate of return assumptions by looking at several factors including historical returns, expected future returns, asset allocation, risks by asset class and other items.
Net pension expense for non-U.S. defined benefit pension plans was:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
|
(Amounts in thousands)
|
Service cost
|
$
|
7,131
|
|
|
$
|
7,832
|
|
|
$
|
6,857
|
|
Interest cost
|
11,623
|
|
|
11,770
|
|
|
14,576
|
|
Expected return on plan assets
|
(10,013
|
)
|
|
(11,693
|
)
|
|
(10,581
|
)
|
Amortization of unrecognized net loss
|
4,751
|
|
|
4,949
|
|
|
6,962
|
|
Amortization of unrecognized prior service cost (benefit)
|
4
|
|
|
(12
|
)
|
|
—
|
|
Settlement and other
|
780
|
|
|
570
|
|
|
314
|
|
Non-U.S. net pension expense
|
$
|
14,276
|
|
|
$
|
13,416
|
|
|
$
|
18,128
|
|
In
2017
, there is
no
significant estimated prior service cost that will be amortized from accumulated other comprehensive loss into pension expense for the non-U.S. defined benefit pension plans. The estimated net loss for the non-U.S. defined benefit pension plans that will be amortized from accumulated other comprehensive loss into pension expense in
2017
is
$3.5 million
. We amortize estimated net losses over the remaining expected service period or over the remaining expected lifetime of inactive participants for plans with only inactive participants.
The following summarizes the net pension liability for non-U.S. plans:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
|
(Amounts in thousands)
|
Plan assets, at fair value
|
$
|
223,491
|
|
|
$
|
230,827
|
|
Benefit Obligation
|
(383,947
|
)
|
|
(386,175
|
)
|
Funded status
|
$
|
(160,456
|
)
|
|
$
|
(155,348
|
)
|
The following summarizes amounts recognized in the balance sheet for non-U.S. plans:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
|
(Amounts in thousands)
|
Noncurrent assets
|
$
|
4,905
|
|
|
$
|
9,570
|
|
Current liabilities
|
(7,932
|
)
|
|
(9,950
|
)
|
Noncurrent liabilities
|
(157,429
|
)
|
|
(154,968
|
)
|
Funded status
|
$
|
(160,456
|
)
|
|
$
|
(155,348
|
)
|
The following is a reconciliation of the non-U.S. plans’ defined benefit pension obligations:
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
(Amounts in thousands)
|
Balance — January 1
|
$
|
386,175
|
|
|
$
|
361,351
|
|
Acquisition
|
—
|
|
|
65,920
|
|
Service cost
|
7,131
|
|
|
7,832
|
|
Interest cost
|
11,623
|
|
|
11,770
|
|
Employee contributions
|
219
|
|
|
312
|
|
Plan amendments and other
|
(10,347
|
)
|
|
(1,254
|
)
|
Actuarial loss (gain) (1)
|
49,826
|
|
|
(6,407
|
)
|
Net benefits and expenses paid
|
(21,735
|
)
|
|
(16,476
|
)
|
Currency translation impact(2)
|
(38,945
|
)
|
|
(36,873
|
)
|
Balance — December 31
|
$
|
383,947
|
|
|
$
|
386,175
|
|
Accumulated benefit obligations at December 31
|
$
|
362,618
|
|
|
$
|
363,918
|
|
_______________________________________
|
|
(1)
|
The 2016 actuarial loss primarily reflects the decrease in the discount rates for U.K. and the Euro-zone.
|
|
|
(2)
|
The currency translation impact reflects the strengthening of the U.S. dollar against our significant currencies, primarily the Euro and British pound.
|
The following table summarizes the expected cash benefit payments for the non-U.S. defined benefit plans in the future (amounts in millions):
|
|
|
|
|
2017
|
$
|
16.5
|
|
2018
|
14.3
|
|
2019
|
14.7
|
|
2020
|
15.0
|
|
2021
|
15.4
|
|
2022-2026
|
84.3
|
|
The following table shows the change in accumulated other comprehensive loss attributable to the components of the net cost and the change in Benefit Obligations for non-U.S. plans, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
(Amounts in thousands)
|
Balance — January 1
|
$
|
(59,993
|
)
|
|
$
|
(69,598
|
)
|
|
$
|
(78,863
|
)
|
Amortization of net loss
|
3,673
|
|
|
3,776
|
|
|
5,262
|
|
Net loss arising during the year
|
(20,071
|
)
|
|
(2,673
|
)
|
|
(3,709
|
)
|
Settlement loss
|
610
|
|
|
390
|
|
|
216
|
|
Prior service (cost) benefit arising during the year
|
—
|
|
|
(14
|
)
|
|
141
|
|
Currency translation impact and other
|
7,521
|
|
|
8,126
|
|
|
7,355
|
|
Balance — December 31
|
$
|
(68,260
|
)
|
|
$
|
(59,993
|
)
|
|
$
|
(69,598
|
)
|
Amounts recorded in accumulated other comprehensive loss consist of:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
|
(Amounts in thousands)
|
Unrecognized net loss
|
$
|
(68,194
|
)
|
|
$
|
(59,878
|
)
|
Unrecognized prior service cost
|
(66
|
)
|
|
(115
|
)
|
Accumulated other comprehensive loss, net of tax
|
$
|
(68,260
|
)
|
|
$
|
(59,993
|
)
|
The following is a reconciliation of the non-U.S. plans’ defined benefit pension assets:
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
(Amounts in thousands)
|
Balance — January 1
|
$
|
230,827
|
|
|
$
|
215,360
|
|
Acquisition
|
—
|
|
|
23,333
|
|
Return on plan assets
|
33,073
|
|
|
3,017
|
|
Employee contributions
|
219
|
|
|
312
|
|
Company contributions
|
20,004
|
|
|
22,785
|
|
Settlements
|
(4,511
|
)
|
|
(1,485
|
)
|
Currency translation impact and other
|
(34,386
|
)
|
|
(16,019
|
)
|
Net benefits and expenses paid
|
(21,735
|
)
|
|
(16,476
|
)
|
Balance — December 31
|
$
|
223,491
|
|
|
$
|
230,827
|
|
Our contributions to non-U.S. defined benefit pension plans in
2017
are expected to be approximately
$6 million
, excluding direct benefits paid.
The asset allocations for the non-U.S. defined benefit pension plans at the end of
2016
and
2015
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Target Allocation at
December 31,
|
|
Percentage of Actual Plan
Assets at December 31,
|
Asset category
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
North American Companies
|
|
7
|
%
|
|
6
|
%
|
|
7
|
%
|
|
6
|
%
|
U.K. Companies
|
|
—
|
%
|
|
8
|
%
|
|
—
|
%
|
|
8
|
%
|
European Companies
|
|
—
|
%
|
|
4
|
%
|
|
—
|
%
|
|
3
|
%
|
Asian Pacific Companies
|
|
—
|
%
|
|
2
|
%
|
|
—
|
%
|
|
2
|
%
|
Global Equity
|
|
8
|
%
|
|
9
|
%
|
|
8
|
%
|
|
8
|
%
|
Equity securities
|
|
15
|
%
|
|
29
|
%
|
|
15
|
%
|
|
27
|
%
|
U.K. Government Gilt Index
|
|
31
|
%
|
|
27
|
%
|
|
31
|
%
|
|
27
|
%
|
U.K. Corporate Bond Index
|
|
1
|
%
|
|
20
|
%
|
|
1
|
%
|
|
19
|
%
|
Global Fixed Income Bond
|
|
2
|
%
|
|
18
|
%
|
|
2
|
%
|
|
18
|
%
|
Liability Driven Investment
|
|
11
|
%
|
|
—
|
%
|
|
11
|
%
|
|
—
|
%
|
Fixed income
|
|
45
|
%
|
|
65
|
%
|
|
45
|
%
|
|
64
|
%
|
Multi-asset
|
|
25
|
%
|
|
—
|
%
|
|
25
|
%
|
|
—
|
%
|
Buy-in Contract
|
|
9
|
%
|
|
—
|
%
|
|
9
|
%
|
|
—
|
%
|
Other
|
|
6
|
%
|
|
6
|
%
|
|
6
|
%
|
|
9
|
%
|
Other Types
|
|
40
|
%
|
|
6
|
%
|
|
40
|
%
|
|
9
|
%
|
None of our common stock is held directly by these plans. In all cases, our investment strategy for these plans is to earn a long-term rate of return consistent with an acceptable degree of risk and minimize our cash contributions over the life of the plan, while taking into account the liquidity needs of the plan and the legal requirements of the particular country. We preserve capital through diversified investments in high quality securities.
Asset allocation differs by plan based upon the plan’s Benefit Obligation to participants, as well as the results of asset and liability studies that are conducted for each plan and in consideration of our future cash flow needs. Professional money management firms manage plan assets and we engage consultants in the U.K. to assist in evaluation of these activities. The assets of the U.K. plans are overseen by a group of Trustees who review the investment strategy, asset allocation and fund selection. These assets are passively managed as they are invested in index funds that attempt to match the performance of the specified benchmark index.
The fair values of the non-U.S. assets were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2016
|
|
At December 31, 2015
|
|
|
|
Hierarchical Levels
|
|
|
|
Hierarchical Levels
|
|
Total
|
|
I
|
|
II
|
|
III
|
|
Total
|
|
I
|
|
II
|
|
III
|
|
(Amounts in thousands)
|
|
(Amounts in thousands)
|
Cash
|
$
|
10,396
|
|
|
$
|
10,396
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,641
|
|
|
$
|
5,641
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Commingled Funds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North American Companies(a)
|
5,945
|
|
|
—
|
|
|
5,945
|
|
|
—
|
|
|
13,737
|
|
|
—
|
|
|
13,737
|
|
|
—
|
|
U.K. Companies(b)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
18,003
|
|
|
—
|
|
|
18,003
|
|
|
—
|
|
European Companies (c)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8,035
|
|
|
—
|
|
|
8,035
|
|
|
—
|
|
Asian Pacific Companies(d)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,378
|
|
|
—
|
|
|
5,378
|
|
|
—
|
|
Global Equity(e)
|
16,774
|
|
|
—
|
|
|
16,774
|
|
|
—
|
|
|
19,581
|
|
|
—
|
|
|
19,581
|
|
|
—
|
|
Fixed income securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.K. Government Gilt Index(f)
|
68,227
|
|
|
—
|
|
|
68,227
|
|
|
—
|
|
|
60,478
|
|
|
—
|
|
|
60,478
|
|
|
—
|
|
U.K. Corporate Bond Index(g)
|
2,785
|
|
|
—
|
|
|
2,785
|
|
|
—
|
|
|
44,318
|
|
|
—
|
|
|
44,318
|
|
|
—
|
|
Global Fixed Income Bond(h)
|
5,259
|
|
|
—
|
|
|
5,259
|
|
|
—
|
|
|
41,325
|
|
|
—
|
|
|
41,325
|
|
|
—
|
|
Liability Driven Investment (i)
|
25,348
|
|
|
—
|
|
|
25,348
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Other Types of Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-asset (j)
|
54,880
|
|
|
—
|
|
|
54,880
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Buy-in Contract (k)
|
20,931
|
|
|
—
|
|
|
—
|
|
|
20,931
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Other(I)
|
12,946
|
|
|
—
|
|
|
—
|
|
|
12,946
|
|
|
14,331
|
|
|
—
|
|
|
—
|
|
|
14,331
|
|
|
$
|
223,491
|
|
|
$
|
10,396
|
|
|
$
|
179,218
|
|
|
$
|
33,877
|
|
|
$
|
230,827
|
|
|
$
|
5,641
|
|
|
$
|
210,855
|
|
|
$
|
14,331
|
|
_______________________________________
|
|
(a)
|
North American Companies represents U.S. and Canadian large cap equity funds, which are managed and track their respective benchmarks (FTSE All-World USA Index and FTSE All-World Canada Index).
|
|
|
(b)
|
U.K. Companies represents a U.K. equity index fund, which is passively managed and tracks the FTSE All-Share Index.
|
|
|
(c)
|
European companies represents a European equity index fund, which is passively managed and tracks the FTSE All-World Developed Europe Ex-U.K. Index.
|
|
|
(d)
|
Asian Pacific Companies represents Japanese and Pacific Rim equity index funds, which are passively managed and track their respective benchmarks (FTSE All-World Japan Index and FTSE All-World Developed Asia Pacific Ex-Japan Index).
|
|
|
(e)
|
Global Equity represents actively managed, global equity funds taking a top-down strategic view on the different regions by analyzing companies based on fundamentals, market-driven, thematic and quantitative factors to generate alpha.
|
|
|
(f)
|
U.K. Government Gilt Index represents U.K. government issued fixed income investments which are passively managed and track the respective benchmarks (FTSE U.K. Gilt Index-Linked Over 5 Years Index, FTSE U.K. Gilt Over 15 Years Index and FTSE UK Gilt Index-Linked Over 25 Years Index).
|
|
|
(g)
|
U.K. Corporate Bond Index represents U.K. corporate bond investments, which are passively managed and track the iBoxx Over 15 years £ Non-Gilt Index.
|
|
|
(h)
|
Global Fixed Income Bond represents investment funds that are actively managed, diversified and invested in traditional government bonds, high-quality corporate bonds, asset backed securities and emerging market debt.
|
|
|
(i)
|
Liability Driven Investment seeks to invest in fixed income securities that closely match those found in discount curves used to value the plan's liabilities.
|
|
|
(j)
|
Multi-asset seeks an attractive risk-adjusted return by investing in a diversified portfolio of strategies, including equities and fixed income.
|
|
|
(k)
|
Buy-in contract represents an asset held by the Netherlands plan, whereby the cost of providing benefits is funded by the contract. The initial investment in this contract of
$19.7 million
was made on January 1, 2016 and fair value and currency adjustments resulted in a fair value of
$20.9 million
at
December 31, 2016
. The fair value of this asset is based on the current present value of accrued benefits and will fluctuate based on changes in the obligations associated with covered plan members as well as the assumptions used in the present value calculation.
|
|
|
(l)
|
Includes assets held by plans outside the United Kingdom and the Netherlands. Details, including Level III rollforward details are not material.
|
Defined Benefit Pension Plans with Accumulated Benefit Obligations in Excess of Plan Assets
The following summarizes key pension plan information regarding U.S. and non-U.S. plans whose accumulated benefit obligations exceed the fair value of their respective plan assets.
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
|
(Amounts in thousands)
|
Benefit Obligation
|
$
|
802,456
|
|
|
$
|
629,402
|
|
Accumulated benefit obligation
|
784,337
|
|
|
614,172
|
|
Fair value of plan assets
|
607,705
|
|
|
449,818
|
|
Postretirement Medical Plans
We sponsor several defined benefit postretirement medical plans covering certain current retirees and a limited number of future retirees in the U.S. These plans provide for medical and dental benefits and are administered through insurance companies and health maintenance organizations. The plans include participant contributions, deductibles, co-insurance provisions and other limitations and are integrated with Medicare and other group plans. We fund the plans as benefits and health maintenance organization premiums are paid, such that the plans hold no assets in any period presented. Accordingly, we have no investment strategy or targeted allocations for plan assets. Benefits under our postretirement medical plans are not available to new employees or most existing employees.
The following are assumptions related to postretirement benefits:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Weighted average assumptions used to determine Benefit Obligation:
|
|
|
|
|
|
|
|
|
Discount rate
|
3.75
|
%
|
|
4.25
|
%
|
|
3.75
|
%
|
Weighted average assumptions used to determine net expense:
|
|
|
|
|
|
Discount rate
|
4.25
|
%
|
|
3.75
|
%
|
|
4.00
|
%
|
The assumed ranges for the annual rates of increase in medical costs used to determine net expense were
7.5%
for
2016
,
2015
and
2014
, with a gradual decrease to
5.0%
for
2025
and future years.
Net postretirement benefit cost (income) for postretirement medical plans was:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
|
(Amounts in thousands)
|
Service cost
|
$
|
1
|
|
|
$
|
2
|
|
|
$
|
3
|
|
Interest cost
|
1,154
|
|
|
1,155
|
|
|
1,200
|
|
Amortization of unrecognized prior service cost
|
122
|
|
|
122
|
|
|
—
|
|
Amortization of unrecognized net gain
|
(355
|
)
|
|
(539
|
)
|
|
(1,220
|
)
|
Net postretirement benefit expense (income)
|
$
|
922
|
|
|
$
|
740
|
|
|
$
|
(17
|
)
|
The estimated prior service cost expected to be amortized from accumulated other comprehensive loss into U.S. pension expense in
2017
is
$0.1 million
. The estimated net loss for postretirement medical plans that will be amortized from accumulated other comprehensive loss into U.S. expense in
2017
is
$0.1 million
.
The following summarizes the accrued postretirement benefits liability for the postretirement medical plans:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
|
(Amounts in thousands)
|
Postretirement Benefit Obligation
|
$
|
27,317
|
|
|
$
|
28,614
|
|
Funded status
|
$
|
(27,317
|
)
|
|
$
|
(28,614
|
)
|
The following summarizes amounts recognized in the balance sheet for postretirement Benefit Obligation:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
|
(Amounts in thousands)
|
Current liabilities
|
$
|
(3,442
|
)
|
|
$
|
(3,582
|
)
|
Noncurrent liabilities
|
(23,875
|
)
|
|
(25,032
|
)
|
Funded status
|
$
|
(27,317
|
)
|
|
$
|
(28,614
|
)
|
The following is a reconciliation of the postretirement Benefit Obligation:
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
(Amounts in thousands)
|
Balance — January 1
|
$
|
28,614
|
|
|
$
|
33,019
|
|
Service cost
|
1
|
|
|
2
|
|
Interest cost
|
1,154
|
|
|
1,155
|
|
Employee contributions
|
856
|
|
|
789
|
|
Medicare subsidies receivable
|
117
|
|
|
71
|
|
Actuarial loss
|
1,907
|
|
|
127
|
|
Plan Amendments
|
—
|
|
|
(625
|
)
|
Net benefits and expenses paid
|
(5,332
|
)
|
|
(5,924
|
)
|
Balance — December 31
|
$
|
27,317
|
|
|
$
|
28,614
|
|
The following presents expected benefit payments for future periods (amounts in millions):
|
|
|
|
|
|
|
|
|
|
Expected
Payments
|
|
Medicare
Subsidy
|
2017
|
$
|
3.5
|
|
|
$
|
0.1
|
|
2018
|
3.2
|
|
|
0.1
|
|
2019
|
3.0
|
|
|
0.1
|
|
2020
|
2.7
|
|
|
0.1
|
|
2021
|
2.4
|
|
|
0.1
|
|
2022-2026
|
9.3
|
|
|
0.3
|
|
The following table shows the change in accumulated other comprehensive loss attributable to the components of the net cost and the change in Benefit Obligations for postretirement benefits, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
(Amounts in thousands)
|
Balance — January 1
|
$
|
1,179
|
|
|
$
|
1,103
|
|
|
$
|
4,445
|
|
Amortization of net gain
|
(223
|
)
|
|
(338
|
)
|
|
(764
|
)
|
Amortization of prior service cost
|
77
|
|
|
76
|
|
|
(1,464
|
)
|
Net (loss) gain arising during the year
|
(1,196
|
)
|
|
338
|
|
|
(1,114
|
)
|
Balance — December 31
|
$
|
(163
|
)
|
|
$
|
1,179
|
|
|
$
|
1,103
|
|
Amounts recorded in accumulated other comprehensive loss consist of:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
|
(Amounts in thousands)
|
Unrecognized net (loss) gain
|
$
|
(455
|
)
|
|
$
|
2,344
|
|
Unrecognized prior service gain (cost)
|
292
|
|
|
(1,165
|
)
|
Accumulated other comprehensive (loss) income, net of tax
|
$
|
(163
|
)
|
|
$
|
1,179
|
|
We made contributions to the postretirement medical plans to pay benefits of
$4.4 million
in
2016
,
$5.1 million
in
2015
and
$3.8 million
in
2014
. Because the postretirement medical plans are unfunded, we make contributions as the covered individuals’ claims are approved for payment. Accordingly, contributions during any period are directly correlated to the benefits paid.
Assumed health care cost trend rates have an effect on the amounts reported for the postretirement medical plans. A one-percentage point change in assumed health care cost trend rates would have the following effect on the
2016
reported amounts (in thousands):
|
|
|
|
|
|
|
|
|
|
1% Increase
|
|
1% Decrease
|
Effect on postretirement Benefit Obligation
|
$
|
149
|
|
|
$
|
(142
|
)
|
Effect on service cost plus interest cost
|
4
|
|
|
(4
|
)
|
Defined Contribution Plans
We sponsor several defined contribution plans covering substantially all U.S. and Canadian employees and certain other non-U.S. employees. Employees may contribute to these plans, and these contributions are matched in varying amounts by us, including opportunities for discretionary matching contributions by us. Defined contribution plan expense was
$17.2 million
in
2016
,
$19.6 million
in
2015
and
$20.4 million
in
2014
.
|
|
13.
|
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.
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, we terminated an employee of an overseas subsidiary after uncovering actions that violated our Code of Business Conduct and may have violated the Foreign Corrupt Practices Act. We completed our internal investigation into the matter, self-reported the potential violation to the United States Department of Justice (the “DOJ”) and the SEC, and continue to cooperate with the DOJ and SEC. We previously received a subpoena from the SEC requesting additional information and documentation related to the matter and have completed our response to the subpoena. We currently believe that this matter will not have a material adverse financial impact on the Company, but there can be no assurance that the Company will not be subjected to monetary penalties and additional costs.
We are also a defendant in a number of other lawsuits, including product liability claims, that are insured, subject to the applicable deductibles, arising in the ordinary course of business, and we are also involved in other uninsured routine litigation incidental to our business. We currently believe none of such litigation, either individually or in the aggregate, is material to our business, operations or overall financial condition. However, litigation is inherently unpredictable, and resolutions or dispositions of claims or lawsuits by settlement or otherwise could have an adverse impact on our financial position, results of operations or cash flows for the reporting period in which any such resolution or disposition occurs.
Although none of the aforementioned potential liabilities can be quantified with absolute certainty except as otherwise indicated above, we have established reserves covering exposures relating to contingencies, to the extent believed to be reasonably estimable and probable based on past experience and available facts. While additional exposures beyond these reserves could exist, they currently cannot be estimated. We will continue to evaluate and update the reserves as necessary and appropriate.
We have recorded reserves for product warranty claims that are included in current liabilities. The following is a summary of the activity in the warranty reserve:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
(Amounts in thousands)
|
Balance — January 1
|
$
|
34,574
|
|
|
$
|
31,095
|
|
|
$
|
37,828
|
|
Accruals for warranty expense, net of adjustments
|
28,364
|
|
|
33,113
|
|
|
24,909
|
|
Settlements made
|
(32,479
|
)
|
|
(29,634
|
)
|
|
(31,642
|
)
|
Balance — December 31
|
$
|
30,459
|
|
|
$
|
34,574
|
|
|
$
|
31,095
|
|
Dividends
- On
February 15, 2016
, our Board of Directors authorized an increase in the payment of quarterly dividends on our common stock from
$0.18
per share to
$0.19
per share payable beginning on
April 8, 2016
. 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 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 at 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. 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 had
no
repurchases of shares of our outstanding common stock for the year ended
December 31, 2016
compared to share repurchases of
6,047,839
for
$303.7 million
and
3,420,656
for
$246.5 million
during
2015
and
2014
, respectively. As of
December 31, 2016
, we have
$160.7 million
of remaining capacity under our current share repurchase program.
The provision for income taxes consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
|
(Amounts in thousands)
|
Current:
|
|
|
|
|
|
|
|
|
U.S. federal
|
$
|
20,569
|
|
|
$
|
62,032
|
|
|
$
|
62,301
|
|
Non-U.S.
|
75,227
|
|
|
78,489
|
|
|
123,052
|
|
State and local
|
2,612
|
|
|
4,947
|
|
|
7,422
|
|
Total current
|
98,408
|
|
|
145,468
|
|
|
192,775
|
|
Deferred:
|
|
|
|
|
|
|
|
|
U.S. federal
|
22,249
|
|
|
(3,509
|
)
|
|
1,270
|
|
Non-U.S.
|
(45,577
|
)
|
|
4,972
|
|
|
14,022
|
|
State and local
|
2,300
|
|
|
1,420
|
|
|
1,244
|
|
Total deferred
|
(21,028
|
)
|
|
2,883
|
|
|
16,536
|
|
Total provision
|
$
|
77,380
|
|
|
$
|
148,351
|
|
|
$
|
209,311
|
|
The expected cash payments for the current income tax expense for
2016
,
2015
and
2014
were reduced by
$0.2 million
,
$6.4 million
and
$8.6 million
, respectively, as a result of tax deductions related to the vesting of restricted stock and the exercise of non-qualified employee stock options. The income tax benefit resulting from these stock-based compensation plans has increased capital in excess of par value.
The provision for income taxes differs from the statutory corporate rate due to the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
|
(Amounts in millions)
|
Statutory federal income tax at 35%
|
$
|
74.5
|
|
|
$
|
144.3
|
|
|
$
|
255.1
|
|
Foreign impact, net
|
(13.9
|
)
|
|
(22.1
|
)
|
|
(54.6
|
)
|
Change in valuation allowance
|
14.2
|
|
|
11.6
|
|
|
(1.6
|
)
|
State and local income taxes, net
|
4.9
|
|
|
6.4
|
|
|
8.7
|
|
Other
|
(2.3
|
)
|
|
8.2
|
|
|
1.7
|
|
Total
|
$
|
77.4
|
|
|
$
|
148.4
|
|
|
$
|
209.3
|
|
Effective tax rate
|
36.3
|
%
|
|
36.0
|
%
|
|
28.7
|
%
|
The 2016 tax rate differed from the federal statutory rate of
35%
primarily due to the net impact of foreign operations, tax impacts from our Realignment Programs and losses in certain foreign jurisdictions for which no tax benefit was provided. Our effective tax rate of
36.3%
for the year ended December 31, 2016 increased from
36.0%
in 2015 due primarily to the tax impacts described above.
The 2015 tax rate differed from the federal statutory rate of 35% primarily due to tax impacts of the realignment programs, the non-deductible Venezuelan exchange rate remeasurement loss, and the establishment of a valuation allowance against our deferred tax assets in Brazil in the amount of $12.6 million, partially offset by the net impact of foreign operations, which included the impacts of lower foreign tax rates and changes in our reserves established for uncertain tax positions. The 2014 tax rate differed from the federal statutory rate of 35% primarily due to the net impact of foreign operations, which included the impacts of lower foreign tax rates and changes in our reserves established for uncertain tax positions.
We assert permanent reinvestment on the majority of invested capital and unremitted foreign earnings in our foreign subsidiaries.
However, we do not assert permanent reinvestment on a limited number of foreign subsidiaries where future
distributions may occur. The cumulative amount of undistributed earnings considered permanently reinvested is
$1.5 billion
.
Should these permanently reinvested earnings be repatriated in a future period in the form of dividends or otherwise, our provision for income taxes may increase materially in that period.
Quantification of the deferred tax liability, if any, associated with indefinitely reinvested differences is not practicable due to the complexities with its hypothetical calculation. During each of the three years reported in the period ended
December 31, 2016
, we have not recognized any net deferred tax assets attributable to excess foreign tax credits on unremitted earnings or foreign currency translation adjustments in our foreign subsidiaries with excess financial reporting basis.
For those subsidiaries where permanent reinvestment was not asserted, we had cash and deemed dividend distributions that resulted in the recognition of
$4.6 million
,
$2.4 million
and
$6.9 million
of income tax benefit in
December 31, 2016
,
2015
and
2014
, respectively. As we have not recorded a benefit for the excess foreign tax credits associated with deemed repatriation of unremitted earnings, these credits are not available to offset the liability associated with these dividends.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the consolidated deferred tax assets and liabilities were:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
|
(Amounts in thousands)
|
Deferred tax assets related to:
|
|
|
|
|
|
Retirement benefits
|
$
|
39,644
|
|
|
$
|
36,845
|
|
Net operating loss carryforwards
|
48,180
|
|
|
29,473
|
|
Compensation accruals
|
30,299
|
|
|
36,695
|
|
Inventories
|
43,445
|
|
|
50,142
|
|
Credit carryforwards
|
64,251
|
|
|
50,380
|
|
Warranty and accrued liabilities
|
35,039
|
|
|
30,897
|
|
Other
|
64,236
|
|
|
41,544
|
|
Total deferred tax assets
|
325,094
|
|
|
275,976
|
|
Valuation allowances
|
(36,191
|
)
|
|
(24,725
|
)
|
Net deferred tax assets
|
288,903
|
|
|
251,251
|
|
Deferred tax liabilities related to:
|
|
|
|
|
|
Property, plant and equipment
|
(47,616
|
)
|
|
(43,348
|
)
|
Goodwill and intangibles
|
(176,935
|
)
|
|
(175,748
|
)
|
Other
|
(716
|
)
|
|
(972
|
)
|
Total deferred tax liabilities
|
(225,267
|
)
|
|
(220,068
|
)
|
Deferred tax assets, net
|
$
|
63,636
|
|
|
$
|
31,183
|
|
We have
$225.0 million
of U.S. and foreign net operating loss carryforwards at
December 31, 2016
. Of this total,
$35.0 million
are state net operating losses. Net operating losses generated in the U.S., if unused, will expire in 2017 through 2027.
The majority of our non-U.S. net operating losses carry forward without expiration. Additionally, we have
$60.0 million
of foreign tax credit carryforwards at
December 31, 2016
, expiring in 2020 through 2026 for which a valuation allowance of
$0.6 million
has been recorded.
Earnings before income taxes comprised:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
|
(Amounts in thousands)
|
U.S.
|
$
|
170,681
|
|
|
$
|
215,719
|
|
|
$
|
230,898
|
|
Non-U.S.
|
42,231
|
|
|
196,647
|
|
|
497,844
|
|
Total
|
$
|
212,912
|
|
|
$
|
412,366
|
|
|
$
|
728,742
|
|
A tabular reconciliation of the total gross amount of unrecognized tax benefits, excluding interest and penalties, is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Balance — January 1
|
$
|
56.1
|
|
|
$
|
51.5
|
|
|
$
|
59.3
|
|
Gross amount of increases in unrecognized tax benefits resulting from tax positions taken:
|
|
|
|
|
|
|
|
During a prior year
|
1.9
|
|
|
9.8
|
|
|
2.7
|
|
During the current period
|
14.3
|
|
|
8.6
|
|
|
7.2
|
|
Decreases in unrecognized tax benefits relating to:
|
|
|
|
|
|
|
Settlements with taxing authorities
|
(4.0
|
)
|
|
(1.1
|
)
|
|
(3.9
|
)
|
Lapse of the applicable statute of limitations
|
(7.3
|
)
|
|
(7.4
|
)
|
|
(10.0
|
)
|
Decreases in unrecognized tax benefits relating to foreign currency translation adjustments
|
(1.7
|
)
|
|
(5.3
|
)
|
|
(3.8
|
)
|
Balance — December 31
|
$
|
59.3
|
|
|
$
|
56.1
|
|
|
$
|
51.5
|
|
The amount of gross unrecognized tax benefits at
December 31, 2016
was
$75.1 million
, which includes
$15.8 million
of accrued interest and penalties. Of this amount
$66.5 million
, if recognized, would favorably impact our effective tax rate. During the years ended December 31, 2016 we recognized net interest and penalty income of
$1.6 million
, for the same period in 2015 we recognized
no
net interest and penalty income and in 2014 we recognized
$1.5 million
.
With limited exception, we are no longer subject to U.S. federal income tax audits for years through 2014, state and local income tax audits for years through 2010 or non-U.S. income tax audits for years through 2009. We are currently under examination for various years in Austria, Canada, 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 up to approximately
$17 million
within the next 12 months.
|
|
17.
|
BUSINESS SEGMENT INFORMATION
|
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.
We conduct our operations through these
three
business segments based on type of product and how we manage the business:
|
|
•
|
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.
|
For decision-making purposes, our Chief Executive Officer ("CEO") and other members of senior executive management use financial information generated and reported at the reportable segment level. Our corporate headquarters does not constitute a separate division or business segment. We evaluate segment performance and allocate resources based on each reportable segment’s operating income. Amounts classified as "Eliminations and All Other" include corporate headquarters costs and other minor entities that do not constitute separate segments. Intersegment sales and transfers are recorded at cost plus a profit margin, with the sales and related margin on such sales eliminated in consolidation.
During the first quarter of 2015, we made composition changes to our EPD and IPD reportable segments to take into consideration the acquisition of SIHI that was closed 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 are now 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 our reportable segments as of and for the years ended
December 31, 2016
,
2015
and
2014
reconciled to the amounts reported in the consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal—Reportable Segments
|
|
Eliminations and All Other
|
|
Consolidated Total
|
|
EPD
|
|
IPD
|
|
FCD
|
|
|
|
|
(Amounts in thousands)
|
Year Ended December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales to external customers
|
|
$1,963,086
|
|
|
$
|
799,923
|
|
|
$
|
1,227,478
|
|
|
$
|
3,990,487
|
|
|
$
|
—
|
|
|
$
|
3,990,487
|
|
Intersegment sales
|
32,873
|
|
|
35,156
|
|
|
6,234
|
|
|
74,263
|
|
|
(74,263
|
)
|
|
—
|
|
Segment operating income (loss)
|
167,420
|
|
|
(6,370
|
)
|
|
198,620
|
|
|
359,670
|
|
|
(91,705
|
)
|
|
267,965
|
|
Depreciation and amortization
|
48,957
|
|
|
28,824
|
|
|
28,189
|
|
|
105,970
|
|
|
10,782
|
|
|
116,752
|
|
Identifiable assets
|
2,082,729
|
|
|
1,010,107
|
|
|
1,310,273
|
|
|
4,403,109
|
|
|
305,814
|
|
|
4,708,923
|
|
Capital expenditures
|
29,426
|
|
|
17,336
|
|
|
26,467
|
|
|
73,229
|
|
|
16,470
|
|
|
89,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal—Reportable Segments
|
|
Eliminations and All Other
|
|
Consolidated Total
|
|
EPD
|
|
IPD
|
|
FCD
|
|
|
|
|
(Amounts in thousands)
|
Year Ended December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales to external customers
|
|
$2,209,809
|
|
|
$
|
937,756
|
|
|
$
|
1,410,226
|
|
|
$
|
4,557,791
|
|
|
$
|
—
|
|
|
$
|
4,557,791
|
|
Intersegment sales
|
46,821
|
|
|
44,137
|
|
|
5,276
|
|
|
96,234
|
|
|
(96,234
|
)
|
|
—
|
|
Segment operating income
|
319,980
|
|
|
29,128
|
|
|
233,616
|
|
|
582,724
|
|
|
(68,059
|
)
|
|
514,665
|
|
Depreciation and amortization
|
50,289
|
|
|
36,826
|
|
|
30,404
|
|
|
117,519
|
|
|
9,568
|
|
|
127,087
|
|
Identifiable assets(1)
|
2,230,134
|
|
|
1,056,400
|
|
|
1,323,758
|
|
|
4,610,292
|
|
|
352,814
|
|
|
4,963,106
|
|
Capital expenditures
|
88,496
|
|
|
19,446
|
|
|
63,569
|
|
|
171,511
|
|
|
10,350
|
|
|
181,861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal—Reportable Segments
|
|
Eliminations and All Other
|
|
Consolidated Total
|
|
EPD
|
|
IPD
|
|
FCD
|
|
|
|
|
(Amounts in thousands)
|
Year Ended December 31, 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales to external customers
|
$
|
2,507,708
|
|
|
$
|
760,923
|
|
|
$
|
1,609,254
|
|
|
$
|
4,877,885
|
|
|
$
|
—
|
|
|
$
|
4,877,885
|
|
Intersegment sales
|
56,902
|
|
|
44,958
|
|
|
6,474
|
|
|
108,334
|
|
|
(108,334
|
)
|
|
—
|
|
Segment operating income
|
446,170
|
|
|
103,574
|
|
|
322,845
|
|
|
872,589
|
|
|
(87,203
|
)
|
|
785,386
|
|
Depreciation and amortization
|
51,047
|
|
|
14,718
|
|
|
35,458
|
|
|
101,223
|
|
|
9,054
|
|
|
110,277
|
|
Identifiable assets(1)
|
2,333,895
|
|
|
620,038
|
|
|
1,425,555
|
|
|
4,379,488
|
|
|
465,179
|
|
|
4,844,667
|
|
Capital expenditures
|
69,107
|
|
|
15,165
|
|
|
37,496
|
|
|
121,768
|
|
|
10,851
|
|
|
132,619
|
|
_______________________________________
(1) Prior period information has been updated to conform to presentation requirements as prescribed by ASU No. 2015-03,
"Interest - Imputation of Interest (Subtopic 835-30)" and ASU No. 2015-17, "Balance Sheet Classification of Deferred Taxes."
Geographic Information
— We attribute sales to different geographic areas based on the facilities’ locations. Long-lived assets are classified based on the geographic area in which the assets are located and exclude deferred taxes, goodwill and intangible assets. Prior period information has been updated to conform to current year presentation. Sales and long-lived assets by geographic area are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2016
|
|
Sales
|
|
Percentage
|
|
Long-Lived
Assets
|
|
Percentage
|
|
(Amounts in thousands, except percentages)
|
United States(5)
|
$
|
1,537,779
|
|
|
38.5
|
%
|
|
$
|
338,038
|
|
|
31.5
|
%
|
EMA(1)
|
1,541,984
|
|
|
38.6
|
%
|
|
288,903
|
|
|
31.8
|
%
|
Asia(2)
|
500,424
|
|
|
12.5
|
%
|
|
144,599
|
|
|
15.9
|
%
|
Other(3)(5)
|
410,300
|
|
|
10.4
|
%
|
|
136,391
|
|
|
20.8
|
%
|
Consolidated total
|
$
|
3,990,487
|
|
|
100.0
|
%
|
|
$
|
907,931
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2015
|
|
Sales
|
|
Percentage
|
|
Long-Lived
Assets
|
|
Percentage
|
|
(Amounts in thousands, except percentages)
|
United States(4)(5)
|
$
|
1,679,075
|
|
|
36.9
|
%
|
|
$
|
338,556
|
|
|
33.6
|
%
|
EMA(1)
|
1,773,281
|
|
|
38.9
|
%
|
|
326,728
|
|
|
33.2
|
%
|
Asia(2)
|
562,792
|
|
|
12.3
|
%
|
|
143,767
|
|
|
14.6
|
%
|
Other(3)(5)
|
542,643
|
|
|
11.9
|
%
|
|
173,706
|
|
|
18.6
|
%
|
Consolidated total
|
$
|
4,557,791
|
|
|
100.0
|
%
|
|
$
|
982,757
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2014
|
|
Sales
|
|
Percentage
|
|
Long-Lived
Assets
|
|
Percentage
|
|
(Amounts in thousands, except percentages)
|
United States(4)(5)
|
$
|
1,724,392
|
|
|
35.4
|
%
|
|
$
|
330,217
|
|
|
36.0
|
%
|
EMA(1)
|
1,991,638
|
|
|
40.8
|
%
|
|
263,411
|
|
|
28.6
|
%
|
Asia(2)
|
571,195
|
|
|
11.7
|
%
|
|
126,878
|
|
|
13.8
|
%
|
Other(3)(5)
|
590,660
|
|
|
12.1
|
%
|
|
199,072
|
|
|
21.6
|
%
|
Consolidated total
|
$
|
4,877,885
|
|
|
100.0
|
%
|
|
$
|
919,578
|
|
|
100.0
|
%
|
___________________________________
|
|
(1)
|
"EMA" includes Europe, the Middle East and Africa. In 2016, 2015 and 2014, Germany accounted for approximately
10%
,
11%
and
7%
, respectively, of consolidated long-lived assets. No other individual country within this group represents
10%
or more of consolidated totals for any period presented.
|
|
|
(2)
|
"Asia" includes Asia and Australia. No individual country within this group represents
10%
or more of consolidated totals for any period presented.
|
|
|
(3)
|
"Other" includes Canada and Latin America. No individual country within this group represents
10%
or more of consolidated totals for any period presented.
|
|
|
(4)
|
Prior period Long-Lived Assets information has been updated to conform to presentation requirements as prescribed by ASU No. 2015-03, "Interest - Imputation of Interest (Subtopic 835-30)."
|
|
|
(5)
|
The Company corrected the classification between the United States and Other for Sales of
$77.3 million
and
$111.0 million
for the years ended
December 31, 2016
and
2015
, respectively, and Long-Lived Assets of
$51.9 million
,
$8.9 million
and
$47.0 million
for the years ended
December 31, 2016
,
2015
and
2014
, respectively.
|
Net sales to international customers, including export sales from the U.S., represented approximately
64%
of total sales in
2016
,
66%
in
2015
and
68%
in
2014
.
Major Customer Information
— We have a large number of customers across a large number of manufacturing and service facilities and do not believe that we have sales to any individual customer that represent
10%
or more of consolidated sales for any of the years presented.
|
|
18.
|
ACCUMULATED OTHER COMPREHENSIVE LOSS
|
The following presents the components of accumulated other comprehensive loss (AOCL), net of related tax effects:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
(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
|
$
|
(411,615
|
)
|
|
$
|
(120,461
|
)
|
|
$
|
(3,458
|
)
|
|
$
|
(535,534
|
)
|
|
$
|
(238,230
|
)
|
|
$
|
(135,398
|
)
|
|
$
|
(5,210
|
)
|
|
$
|
(378,838
|
)
|
Other comprehensive (loss) income before reclassifications
|
(71,994
|
)
|
|
(23,939
|
)
|
|
1,064
|
|
|
(94,869
|
)
|
|
(173,385
|
)
|
|
4,977
|
|
|
(6,382
|
)
|
|
(174,790
|
)
|
Amounts
reclassified
from AOCL
|
—
|
|
|
7,870
|
|
|
1,156
|
|
|
9,026
|
|
|
—
|
|
|
9,960
|
|
|
8,134
|
|
|
18,094
|
|
Net current-period other comprehensive (loss) income
|
(71,994
|
)
|
|
(16,069
|
)
|
|
2,220
|
|
|
(85,843
|
)
|
|
(173,385
|
)
|
|
14,937
|
|
|
1,752
|
|
|
(156,696
|
)
|
Balance - December 31
|
$
|
(483,609
|
)
|
|
$
|
(136,530
|
)
|
|
$
|
(1,238
|
)
|
|
$
|
(621,377
|
)
|
|
$
|
(411,615
|
)
|
|
$
|
(120,461
|
)
|
|
$
|
(3,458
|
)
|
|
$
|
(535,534
|
)
|
_______________________________________
|
|
(1)
|
Includes foreign currency translation adjustments attributable to noncontrolling interests of
$3.4 million
,
$2.7 million
and
$1.3 million
for
December 31, 2016
,
2015
and
2014
, respectively. Foreign currency translation impact primarily represents the weakening of the British pound, Euro, and Mexican peso exchange rates versus the U.S. dollar for the period. Includes net investment hedge gain of
$1.4 million
and loss of
$4.2 million
(2)
, net of deferred taxes, for the year ended
December 31, 2016
and
2015
, respectively. Amounts in parentheses indicate debits.
|
(2) Previously disclosed as a gain of
$5.6 million
. No incremental impact on our consolidated financial condition or result of operation.
The following table presents the reclassifications out of AOCL:
|
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands)
|
|
Affected line item in the statement of income
|
2016(1)
|
|
2015(1)
|
Cash flow hedging activity
|
|
|
|
|
|
Foreign exchange contracts
|
|
Other income (expense), net
|
$
|
—
|
|
|
$
|
(3,327
|
)
|
|
|
Sales
|
(1,531
|
)
|
|
(7,920
|
)
|
|
|
Tax benefit
|
375
|
|
|
3,113
|
|
|
|
Net of tax
|
$
|
(1,156
|
)
|
|
$
|
(8,134
|
)
|
|
|
|
|
|
|
Pension and other postretirement effects
|
|
|
|
|
|
Amortization of actuarial losses(2)
|
|
|
$
|
(9,750
|
)
|
|
$
|
(13,587
|
)
|
Prior service costs(2)
|
|
|
(492
|
)
|
|
(619
|
)
|
Settlement(2)
|
|
|
(871
|
)
|
|
(570
|
)
|
|
|
Tax benefit
|
3,243
|
|
|
4,816
|
|
|
|
Net of tax
|
$
|
(7,870
|
)
|
|
$
|
(9,960
|
)
|
______________________________________
(1) Amounts in parentheses indicate decreases to income. None of the reclassification amounts have a noncontrolling interest component.
(2) These accumulated other comprehensive loss components are included in the computation of net periodic pension cost. See Note 12 for additional details.
At
December 31, 2016
, we
expect to recognize losses of
$0.1 million
,
net of deferred taxes, into earnings in the next twelve months related to designated cash flow hedges based on their fair values at
December 31, 2016
.
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. 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 consolidation of facilities, a reduction in our workforce, the transfer of activities from high-cost regions to lower-cost facilities and the divestiture of certain non-strategic assets.
The R1 Realignment Program and the R2 Realignment Program (collectively the "Realignment Programs") consist of both restructuring and non-restructuring charges. Restructuring charges represent costs associated with the relocation or reorganization of certain business activities and facility closures and include related severance costs. Non-restructuring charges are primarily employee severance associated with workforce reductions to reduce redundancies. Expenses are primarily reported in COS or SG&A, as applicable, in our condensed consolidated statements of income. We anticipate a total investment in these programs of approximately
$400 million
, including projects still under final evaluation. We anticipate that the majority of any remaining charges will be incurred throughout 2017.
Generally, the aforementioned charges will be paid in cash, except for asset write-downs, which are non-cash charges. The following is a summary of total charges, net of adjustments, related to the Realignment Programs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
(Amounts in thousands)
|
Engineered Product Division
|
|
Industrial Product Division
|
|
Flow Control Division
|
|
Subtotal–Reportable Segments
|
|
Eliminations and All Other
|
|
Consolidated Total
|
Restructuring Charges
|
|
|
|
|
|
|
|
|
|
|
|
COS
|
$
|
24,748
|
|
|
$
|
20,202
|
|
|
$
|
4,688
|
|
|
$
|
49,638
|
|
|
$
|
—
|
|
|
$
|
49,638
|
|
SG&A
|
10,342
|
|
|
6,338
|
|
|
1,941
|
|
|
18,621
|
|
|
18
|
|
|
18,639
|
|
Income tax expense
|
6,000
|
|
|
2,800
|
|
|
600
|
|
|
9,400
|
|
|
—
|
|
|
9,400
|
|
|
$
|
41,090
|
|
|
$
|
29,340
|
|
|
$
|
7,229
|
|
|
$
|
77,659
|
|
|
$
|
18
|
|
|
$
|
77,677
|
|
Non-Restructuring Charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COS
|
$
|
5,894
|
|
|
$
|
6,022
|
|
|
$
|
3,350
|
|
|
$
|
15,266
|
|
|
$
|
8
|
|
|
$
|
15,274
|
|
SG&A
|
3,462
|
|
|
2,062
|
|
|
1,426
|
|
|
6,950
|
|
|
4,432
|
|
|
11,382
|
|
|
$
|
9,356
|
|
|
$
|
8,084
|
|
|
$
|
4,776
|
|
|
$
|
22,216
|
|
|
$
|
4,440
|
|
|
$
|
26,656
|
|
Total Realignment Charges
|
|
|
|
|
|
|
|
|
|
|
COS
|
$
|
30,642
|
|
|
$
|
26,224
|
|
|
$
|
8,038
|
|
|
$
|
64,904
|
|
|
$
|
8
|
|
|
$
|
64,912
|
|
SG&A
|
13,804
|
|
|
8,400
|
|
|
3,367
|
|
|
25,571
|
|
|
4,450
|
|
|
30,021
|
|
Income tax expense
|
6,000
|
|
|
2,800
|
|
|
600
|
|
|
9,400
|
|
|
—
|
|
|
9,400
|
|
Total
|
$
|
50,446
|
|
|
$
|
37,424
|
|
|
$
|
12,005
|
|
|
$
|
99,875
|
|
|
$
|
4,458
|
|
|
$
|
104,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 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
|
$
|
9,963
|
|
|
$
|
20,446
|
|
|
$
|
9,301
|
|
|
$
|
39,710
|
|
|
$
|
—
|
|
|
$
|
39,710
|
|
SG&A
|
7,475
|
|
|
9,259
|
|
|
7,611
|
|
|
24,345
|
|
|
—
|
|
|
24,345
|
|
Income tax expense(1)
|
3,400
|
|
|
6,500
|
|
|
1,200
|
|
|
11,100
|
|
|
—
|
|
|
11,100
|
|
|
$
|
20,838
|
|
|
$
|
36,205
|
|
|
$
|
18,112
|
|
|
$
|
75,155
|
|
|
$
|
—
|
|
|
$
|
75,155
|
|
Non-Restructuring Charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COS
|
10,266
|
|
|
8,161
|
|
|
$
|
8,583
|
|
|
$
|
27,010
|
|
|
$
|
—
|
|
|
$
|
27,010
|
|
SG&A
|
6,531
|
|
|
6,148
|
|
|
3,413
|
|
|
16,092
|
|
|
—
|
|
|
16,092
|
|
|
$
|
16,797
|
|
|
$
|
14,309
|
|
|
$
|
11,996
|
|
|
$
|
43,102
|
|
|
$
|
—
|
|
|
$
|
43,102
|
|
Total Realignment Charges
|
|
|
|
|
|
|
|
|
|
|
COS
|
$
|
20,229
|
|
|
$
|
28,607
|
|
|
$
|
17,884
|
|
|
$
|
66,720
|
|
|
$
|
—
|
|
|
$
|
66,720
|
|
SG&A
|
14,006
|
|
|
15,407
|
|
|
11,024
|
|
|
40,437
|
|
|
—
|
|
|
40,437
|
|
Income tax expense(1)
|
3,400
|
|
|
6,500
|
|
|
1,200
|
|
|
11,100
|
|
|
—
|
|
|
11,100
|
|
Total
|
$
|
37,635
|
|
|
$
|
50,514
|
|
|
$
|
30,108
|
|
|
$
|
118,257
|
|
|
$
|
—
|
|
|
$
|
118,257
|
|
____________________________________
(1) Income tax expense includes exit taxes as well as non-deductible costs.
The following is a summary of total inception to date charges, net of adjustments, related to the Realignment Programs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inception to Date
|
(Amounts in thousands)
|
Engineered Product Division
|
|
Industrial Product Division (1)
|
|
Flow Control Division
|
|
Subtotal–Reportable Segments
|
|
Eliminations and All Other
|
|
Consolidated Total
|
Restructuring Charges
|
|
|
|
|
|
|
|
|
|
|
COS
|
$
|
34,711
|
|
|
$
|
40,648
|
|
|
$
|
13,989
|
|
|
$
|
89,348
|
|
|
$
|
—
|
|
|
$
|
89,348
|
|
SG&A
|
17,817
|
|
|
15,597
|
|
|
9,552
|
|
|
42,966
|
|
|
18
|
|
|
42,984
|
|
Income tax expense(2)
|
9,400
|
|
|
9,300
|
|
|
1,800
|
|
|
20,500
|
|
|
—
|
|
|
20,500
|
|
|
$
|
61,928
|
|
|
$
|
65,545
|
|
|
$
|
25,341
|
|
|
$
|
152,814
|
|
|
$
|
18
|
|
|
$
|
152,832
|
|
Non-Restructuring Charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COS
|
$
|
16,160
|
|
|
$
|
14,183
|
|
|
$
|
11,933
|
|
|
$
|
42,276
|
|
|
$
|
8
|
|
|
$
|
42,284
|
|
SG&A
|
9,993
|
|
|
8,210
|
|
|
4,839
|
|
|
23,042
|
|
|
4,432
|
|
|
27,474
|
|
|
$
|
26,153
|
|
|
$
|
22,393
|
|
|
$
|
16,772
|
|
|
$
|
65,318
|
|
|
$
|
4,440
|
|
|
$
|
69,758
|
|
Total Realignment Charges
|
|
|
|
|
|
|
|
|
|
|
COS
|
$
|
50,871
|
|
|
$
|
54,831
|
|
|
$
|
25,922
|
|
|
$
|
131,624
|
|
|
$
|
8
|
|
|
$
|
131,632
|
|
SG&A
|
27,810
|
|
|
23,807
|
|
|
14,391
|
|
|
66,008
|
|
|
4,450
|
|
|
70,458
|
|
Income tax expense(2)
|
9,400
|
|
|
9,300
|
|
|
1,800
|
|
|
20,500
|
|
|
—
|
|
|
20,500
|
|
Total
|
$
|
88,081
|
|
|
$
|
87,938
|
|
|
$
|
42,113
|
|
|
$
|
218,132
|
|
|
$
|
4,458
|
|
|
$
|
222,590
|
|
___________________________
(1) Includes
$46.8 million
of restructuring charges, primarily COS, related to the R1 Realignment Program.
(2) Income tax expense includes exit taxes as well as non-deductible costs.
Restructuring charges represent costs associated with the relocation or reorganization of certain business activities and facility closures and include costs related to employee severance at closed facilities, contract termination costs, asset write-downs and other costs. Severance costs primarily include costs associated with involuntary termination benefits. Contract termination costs include costs related to termination of operating leases or other contract termination costs. Asset write-downs include accelerated depreciation of fixed assets, accelerated amortization of intangible assets, divestiture of certain non-strategic assets and inventory write-downs. Other costs generally include costs related to employee relocation, asset relocation, vacant facility costs (i.e., taxes and insurance) and other charges.
The following is a summary of restructuring charges, net of adjustments, for the Realignment Programs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
(Amounts in thousands)
|
Severance
|
|
Contract Termination
|
|
Asset Write-Downs
|
|
Other
|
|
Total
|
COS
|
$
|
37,972
|
|
|
$
|
—
|
|
|
$
|
5,429
|
|
|
$
|
6,237
|
|
|
$
|
49,638
|
|
SG&A
|
7,247
|
|
|
—
|
|
|
1,384
|
|
|
10,008
|
|
|
18,639
|
|
Income tax expense(1)
|
—
|
|
|
—
|
|
|
—
|
|
|
9,400
|
|
|
9,400
|
|
Total
|
$
|
45,219
|
|
|
$
|
—
|
|
|
$
|
6,813
|
|
|
$
|
25,645
|
|
|
$
|
77,677
|
|
_____________________________________
(1) Income tax expense includes exit taxes as well as non-deductible costs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
(Amounts in thousands)
|
Severance
|
|
Contract Termination
|
|
Asset Write-Downs
|
|
Other
|
|
Total
|
COS
|
$
|
33,972
|
|
|
$
|
609
|
|
|
$
|
3,488
|
|
|
$
|
1,641
|
|
|
$
|
39,710
|
|
SG&A
|
23,520
|
|
|
43
|
|
|
44
|
|
|
738
|
|
|
24,345
|
|
Income tax expense(1)
|
—
|
|
|
—
|
|
|
—
|
|
|
11,100
|
|
|
11,100
|
|
Total
|
$
|
57,492
|
|
|
$
|
652
|
|
|
$
|
3,532
|
|
|
$
|
13,479
|
|
|
$
|
75,155
|
|
_____________________________________
(1) Income tax expense includes exit taxes as well as non-deductible costs.
The following is a summary of total inception to date restructuring charges, net of adjustments, related to the Realignment Programs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inception to Date
|
(Amounts in thousands)
|
Severance
|
|
Contract Termination
|
|
Asset Write-Downs
|
|
Other
|
|
Total (1)
|
COS(1)
|
$
|
71,944
|
|
|
$
|
609
|
|
|
$
|
8,917
|
|
|
$
|
7,878
|
|
|
$
|
89,348
|
|
SG&A
|
30,767
|
|
|
43
|
|
|
1,428
|
|
|
10,746
|
|
|
42,984
|
|
Income tax expense(2)
|
—
|
|
|
—
|
|
|
—
|
|
|
20,500
|
|
|
20,500
|
|
Total
|
$
|
102,711
|
|
|
$
|
652
|
|
|
$
|
10,345
|
|
|
$
|
39,124
|
|
|
$
|
152,832
|
|
_______________________________
(1) Includes
$46.8 million
of restructuring charges, primarily COS, related to the R1 Realignment Program.
(2) Income tax expense includes exit taxes as well as non-deductible costs.
The following represents the activity, primarily severance, related to the restructuring reserve for the Realignment Programs:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands)
|
R1 Realignment Program
|
|
R2 Realignment Program
|
|
Total
|
Balance at December 31, 2014
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Charges
|
29,705
|
|
|
34,350
|
|
|
64,055
|
|
Cash expenditures
|
(383
|
)
|
|
(1,791
|
)
|
|
(2,174
|
)
|
Other non-cash adjustments, including currency
|
(4,166
|
)
|
|
589
|
|
|
(3,577
|
)
|
Balance at December 31,2015
|
$
|
25,156
|
|
|
$
|
33,148
|
|
|
$
|
58,304
|
|
Charges
|
11,066
|
|
|
46,805
|
|
|
57,871
|
|
Cash expenditures
|
(24,087
|
)
|
|
(38,869
|
)
|
|
(62,956
|
)
|
Other non-cash adjustments, including currency
|
459
|
|
|
6,649
|
|
|
7,108
|
|
Balance at December 31, 2016
|
$
|
12,594
|
|
|
$
|
47,733
|
|
|
$
|
60,327
|
|
|
|
20.
|
QUARTERLY FINANCIAL DATA (UNAUDITED)
|
The prior period consolidated financial information has been revised for errors identified in the second quarter of 2017, see Note 2 for further discussion. The following presents a summary of the unaudited quarterly data for
2016
and
2015
(amounts in millions, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
Quarter
|
|
4th
|
|
3rd (2)
|
|
2nd
|
|
1st
|
Sales
|
|
$
|
1,071.0
|
|
|
$
|
945.9
|
|
|
$
|
1,027.4
|
|
|
$
|
946.2
|
|
Gross profit
|
|
327.3
|
|
|
278.0
|
|
|
320.7
|
|
|
305.2
|
|
Earnings (loss) before income taxes
|
|
89.7
|
|
|
(12.2
|
)
|
|
83.9
|
|
|
51.5
|
|
Net earnings (loss) attributable to Flowserve Corporation
|
|
60.0
|
|
|
(15.8
|
)
|
|
54.4
|
|
|
33.9
|
|
Earnings (loss) per share (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.46
|
|
|
$
|
(0.12
|
)
|
|
$
|
0.42
|
|
|
$
|
0.26
|
|
Diluted
|
|
0.46
|
|
|
(0.12
|
)
|
|
0.42
|
|
|
0.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
Quarter
|
|
4th (3)
|
|
3rd
|
|
2nd
|
|
1st
|
Sales
|
|
$
|
1,287.7
|
|
|
$
|
1,094.2
|
|
|
$
|
1,161.4
|
|
|
$
|
1,014.5
|
|
Gross profit
|
|
389.8
|
|
|
386.5
|
|
|
368.5
|
|
|
332.7
|
|
Earnings before income taxes
|
|
102.6
|
|
|
144.2
|
|
|
106.7
|
|
|
58.9
|
|
Net earnings attributable to Flowserve Corporation
|
|
64.7
|
|
|
91.2
|
|
|
74.2
|
|
|
28.4
|
|
Earnings per share (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.49
|
|
|
$
|
0.69
|
|
|
$
|
0.55
|
|
|
$
|
0.21
|
|
Diluted
|
|
0.49
|
|
|
0.68
|
|
|
0.55
|
|
|
0.21
|
|
_______________________________________
|
|
(1)
|
Earnings per share is computed independently for each of the quarters presented. The sum of the quarters may not equal the total year amount due to the impact of changes in weighted average quarterly shares outstanding.
|
|
|
(2)
|
The increase in gross profit and decrease in net loss from the revision primarily relate to errors previously recorded out of period of
$12.5 million
in the aggregate, partially offset by the receivables from our primary Venezuelan customer which should have been included in the reserve.
|
|
|
(3)
|
The gross profit and net earnings include a decrease from the revision adjustment primarily related to amounts previously recorded out of period of
$6.7 million
in the aggregate.
|
The significant fourth quarter impact to 2016 earnings before income taxes was to record
$29.8 million
in charges related to our Realignment Programs. See Note 19 for additional information on our Realignment Programs.
The significant fourth quarter impact to 2015 earnings before income tax was to record
$52.4 million
in charges related to our Realignment Programs. In addition, there was
$31.5 million
less broad-based annual incentive compensation expense in the fourth quarter of 2015 as compared to the same period in 2014.