Flowserve(FLS) - 2021 Q3 - Quarterly Report

PART I – FINANCIAL INFORMATION Item 1. Financial Statements This section presents Flowserve Corporation's unaudited condensed consolidated financial statements for the periods ended September 30, 2021, and 2020, including statements of income, comprehensive income, balance sheets, shareholders' equity, and cash flows, with detailed notes - The financial statements are unaudited and include normal recurring adjustments necessary for fair statement[28] - Prior period information has been updated to conform to current year presentation[28] Condensed Consolidated Statements of Income and Comprehensive Income (Loss) (Three Months) This section provides the unaudited condensed consolidated statements of income and comprehensive income for the three months ended September 30, 2021 and 2020 Condensed Consolidated Statements of Income (Three Months Ended September 30) | Metric | 2021 ($ thousands) | 2020 ($ thousands) | | :---------------------------------------------- | :----------------- | :----------------- | | Sales | 866,118 | 924,301 | | Gross profit | 253,492 | 285,209 | | Operating income | 57,362 | 87,322 | | Net earnings attributable to Flowserve Corporation | 49,785 | 56,115 | | Basic EPS | 0.38 | 0.43 | | Diluted EPS | 0.38 | 0.43 | Condensed Consolidated Statements of Comprehensive Income (Loss) (Three Months Ended September 30) | Metric | 2021 ($ thousands) | 2020 ($ thousands) | | :---------------------------------------------------- | :----------------- | :----------------- | | Net earnings, including noncontrolling interests | 51,809 | 58,762 | | Other comprehensive income (loss) | (11,953) | 18,620 | | Comprehensive income (loss) attributable to Flowserve Corporation | 37,835 | 74,739 | Condensed Consolidated Statements of Income and Comprehensive Income (Loss) (Nine Months) This section presents the unaudited condensed consolidated statements of income and comprehensive income for the nine months ended September 30, 2021 and 2020 Condensed Consolidated Statements of Income (Nine Months Ended September 30) | Metric | 2021 ($ thousands) | 2020 ($ thousands) | | :---------------------------------------------- | :----------------- | :----------------- | | Sales | 2,621,604 | 2,742,826 | | Gross profit | 782,630 | 821,375 | | Operating income | 185,628 | 154,977 | | Net earnings attributable to Flowserve Corporation | 109,218 | 74,369 | | Basic EPS | 0.84 | 0.57 | | Diluted EPS | 0.83 | 0.57 | Condensed Consolidated Statements of Comprehensive Income (Loss) (Nine Months Ended September 30) | Metric | 2021 ($ thousands) | 2020 ($ thousands) | | :---------------------------------------------------- | :----------------- | :----------------- | | Net earnings, including noncontrolling interests | 116,713 | 81,259 | | Other comprehensive income (loss) | (2,309) | (50,226) | | Comprehensive income (loss) attributable to Flowserve Corporation | 106,750 | 23,371 | Condensed Consolidated Balance Sheets This section details the unaudited condensed consolidated balance sheets as of September 30, 2021, and December 31, 2020 Condensed Consolidated Balance Sheets (as of September 30, 2021 and December 31, 2020) | Metric | Sep 30, 2021 ($ thousands) | Dec 31, 2020 ($ thousands) | | :----------------------------------- | :------------------------- | :------------------------- | | Cash and cash equivalents | 1,457,269 | 1,095,274 | | Total current assets | 3,223,223 | 2,904,333 | | Total assets | 5,595,916 | 5,314,677 | | Total current liabilities | 1,908,885 | 1,141,633 | | Debt due within one year | 836,618 | 8,995 | | Long-term debt due after one year | 1,272,246 | 1,717,911 | | Total Flowserve Corporation shareholders' equity | 1,759,504 | 1,730,991 | | Total equity | 1,791,233 | 1,761,321 | Condensed Consolidated Statements of Shareholders' Equity (Three Months) This section outlines the unaudited condensed consolidated statements of shareholders' equity for the three months ended September 30, 2021 and 2020 Condensed Consolidated Statements of Shareholders' Equity (Three Months Ended September 30) | Metric | Sep 30, 2021 ($ thousands) | Sep 30, 2020 ($ thousands) | | :---------------------------------------------- | :------------------------- | :------------------------- | | Balance — July 1 | 1,770,692 | 1,646,210 | | Net earnings | 51,809 | 58,762 | | Cash dividends declared | (26,395) | (26,357) | | Other comprehensive income (loss), net of tax | (11,953) | 18,620 | | Balance — September 30 | 1,791,233 | 1,702,344 | Condensed Consolidated Statements of Stockholders' Equity (Nine Months) This section presents the unaudited condensed consolidated statements of stockholders' equity for the nine months ended September 30, 2021 and 2020 Condensed Consolidated Statements of Shareholders' Equity (Nine Months Ended September 30) | Metric | Sep 30, 2021 ($ thousands) | Sep 30, 2020 ($ thousands) | | :---------------------------------------------- | :------------------------- | :------------------------- | | Balance — January 1 | 1,761,321 | 1,772,340 | | Net earnings | 116,713 | 81,259 | | Cash dividends declared | (79,254) | (79,095) | | Repurchases of common shares | (17,531) | (32,112) | | Other comprehensive income (loss), net of tax | (2,309) | (50,226) | | Balance — September 30 | 1,791,233 | 1,702,344 | Condensed Consolidated Statements of Cash Flows This section provides the unaudited condensed consolidated statements of cash flows for the nine months ended September 30, 2021 and 2020 Condensed Consolidated Statements of Cash Flows (Nine Months Ended September 30) | Cash Flow Activity | 2021 ($ thousands) | 2020 ($ thousands) | | :------------------------------------------------ | :----------------- | :----------------- | | Net cash flows provided (used) by operating activities | 151,107 | 114,251 | | Net cash flows provided (used) by investing activities | (38,713) | (32,665) | | Net cash flows provided (used) by financing activities | 272,344 | 178,855 | | Net change in cash and cash equivalents | 361,995 | 250,198 | | Cash and cash equivalents at end of period | 1,457,269 | 921,178 | - Financing activities in 2021 included $498.3 million from senior notes issuance and $300.0 million from a term loan facility, partially offset by $407.5 million in senior notes payments[25] Notes to Condensed Consolidated Financial Statements This section provides detailed notes offering context and breakdowns for various financial accounts and activities within the unaudited condensed consolidated financial statements - The notes provide additional information and details to the condensed consolidated financial statements, including accounting policies, revisions to prior period information, and specific disclosures for various accounts[28] Note 1. Basis of Presentation and Accounting Policies This note describes the basis of presentation for the unaudited financial statements and outlines the significant accounting policies applied - The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements in the 2020 Annual Report on Form 10-K[28] - An accounting error involving foreign currency transactions from Q1 2020 through year-end 2020 was identified and corrected, leading to adjustments in retirement obligations, retained earnings, and accumulated other comprehensive loss[28] - The COVID-19 pandemic continues to impact global markets, leading to reduced capital expenditures by customers, though MRO and aftermarket spending are returning to pre-pandemic levels[28] - Adoption of ASU No. 2020-01, ASU No. 2020-04 (Reference Rate Reform), and ASU No. 2020-10 did not have a material impact on the consolidated financial condition, results of operations, or net cash flows[30] Note 2. Revision to Previously Reported Financial Information This note details the revision of previously reported financial information due to an identified accounting error related to foreign currency transactions - An accounting error related to foreign currency transactions was identified in Q1 2021, affecting financial statements from Q1 2020 through year-end 2020[31] Impact on Balance Sheet (September 30, 2020) | Item | As Reported ($ thousands) | Adjustments ($ thousands) | As Revised ($ thousands) | | :------------------------------------- | :------------------------ | :------------------------ | :----------------------- | | Retirement obligations and other liabilities | 541,721 | 1,499 | 543,220 | | Retained earnings | 3,625,291 | 14,937 | 3,640,228 | | Accumulated other comprehensive loss | (618,856) | (16,436) | (635,292) | | Total Flowserve Corporation shareholders' equity | 1,673,421 | (1,499) | 1,671,922 | | Total equity | 1,703,843 | (1,499) | 1,702,344 | Impact on Income Statement (Three Months Ended September 30, 2020) | Item | As Reported ($ thousands) | Adjustments ($ thousands) | As Revised ($ thousands) | | :------------------------------------- | :------------------------ | :------------------------ | :----------------------- | | Other income (expense), net | (963) | 5,636 | 4,673 | | Earnings before income taxes | 72,322 | 5,636 | 77,958 | | Net earnings attributable to Flowserve Corporation | 51,003 | 5,112 | 56,115 | | Diluted EPS | 0.39 | 0.04 | 0.43 | Impact on Cash Flows (Nine Months Ended September 30, 2020) | Item | As Reported ($ thousands) | Adjustments ($ thousands) | As Revised ($ thousands) | | :------------------------------------- | :------------------------ | :------------------------ | :----------------------- | | Net cash flows provided (used) by operating activities | 115,629 | (1,378) | 114,251 | | Net cash flows provided (used) by investing activities | (34,160) | 1,495 | (32,665) | Note 3. Revenue Recognition This note explains the company's revenue recognition policies, including disaggregation by business segment and revenue source - The majority of revenue (approximately 85%) is recognized at a point in time, while 15% is recognized over time using the percentage of completion method[46] - Revenue is disaggregated by two business segments: Flowserve Pump Division (FPD) and Flow Control Division (FCD), and by revenue source: Original Equipment and Aftermarket sales and services[47][48] Disaggregated Revenue by Segment and Source (Three Months Ended September 30, 2021) | Revenue Source | FPD ($ thousands) | FCD ($ thousands) | Total ($ thousands) | | :----------------- | :---------------- | :---------------- | :------------------ | | Original Equipment | 223,358 | 201,890 | 425,248 | | Aftermarket | 377,750 | 63,120 | 440,870 | | Total | 601,108 | 265,010 | 866,118 | - As of September 30, 2021, the aggregate transaction price allocated to unsatisfied performance obligations was approximately $493 million, with $145 million expected in the remainder of 2021 and $348 million in 2022 and thereafter[53] Note 4. Allowance for Expected Credit Losses This note describes the methodology for estimating expected credit losses and details changes in the allowance for trade receivables and contract assets - The allowance for credit losses is an estimate of expected credit losses over the life of financial assets, assessed collectively or individually based on risk characteristics[57] Changes in Allowance for Expected Credit Losses (Nine Months Ended September 30, 2021) | Item | Trade receivables ($ thousands) | Contract assets ($ thousands) | | :-------------------------------------- | :------------------------------ | :---------------------------- | | Beginning balance, January 1, 2021 | 75,176 | 3,205 | | Charges to cost and expenses, net of recoveries | 4,234 | — | | Write-offs | (2,015) | — | | Currency effects and other, net | (1,429) | (427) | | Ending balance, September 30, 2021 | 75,966 | 2,778 | - The allowance for long-term receivables, included in other assets, net, primarily consists of reserved receivables associated with the national oil company in Venezuela, totaling $67.7 million as of September 30, 2021[60] Note 5. Stock-Based Compensation Plans This note provides information on the company's stock-based compensation plans, including authorized shares and expense details - The Flowserve Corporation 2020 Long-Term Incentive Plan authorizes the issuance of 12,500,000 shares, with 11,312,201 shares available for issuance as of September 30, 2021[61] Stock-Based Compensation Expense (Pre-tax) | Period | Amount ($ millions) | | :-------------------------------------- | :------------------ | | Three months ended September 30, 2021 | 7.1 | | Three months ended September 30, 2020 | 5.6 | | Nine months ended September 30, 2021 | 23.6 | | Nine months ended September 30, 2020 | 24.1 | Restricted Shares Information (as of September 30, 2021) | Item | Number of unvested shares | Weighted Average Grant-Date Fair Value | | :------------------------------------- | :------------------------ | :------------------------------------- | | Outstanding - January 1, 2021 | 1,373,657 | $46.76 | | Granted | 1,000,997 | $39.59 | | Vested | (555,708) | $44.27 | | Forfeited | (133,649) | $47.19 | | Outstanding as of September 30, 2021 | 1,685,297 | $43.29 | Note 6. Derivative Instruments and Hedges This note details the company's use of derivative instruments, such as foreign exchange forward contracts and cross-currency swaps, for hedging purposes - Flowserve uses foreign exchange forward contracts to hedge cash flow risks, with a notional value of $361.3 million at September 30, 2021[64] Fair Values of Foreign Exchange Contracts | Item | Sep 30, 2021 ($ thousands) | Dec 31, 2020 ($ thousands) | | :------------------------------------- | :------------------------- | :------------------------- | | Current derivative assets | 2,533 | 2,857 | | Noncurrent derivative assets | — | 249 | | Current derivative liabilities | 4,800 | 682 | | Noncurrent derivative liabilities | 99 | — | - Cross-currency swap agreements with a combined notional value of €423.2 million are designated as net investment hedges for Euro investments in international subsidiaries[65] Note 7. Debt This note provides a breakdown of the company's debt and finance lease obligations, including recent financing activities and debt redemptions Debt and Finance Lease Obligations | Item | Sep 30, 2021 ($ thousands) | Dec 31, 2020 ($ thousands) | | :------------------------------------- | :------------------------- | :------------------------- | | Debt and finance lease obligations | 2,108,864 | 1,726,906 | | Less amounts due within one year | 836,618 | 8,995 | | Total debt due after one year | 1,272,246 | 1,717,911 | - Completed a public offering of $500.0 million in 2.800% Senior Notes due January 15, 2032, and drew approximately $300.0 million under an unsecured Term Loan Facility in September 2021[68][69] - The 2022 Senior Notes and 2023 Senior Notes were classified as current as of September 30, 2021, and were redeemed in full on October 12, 2021, resulting in an estimated $38.0 million loss on early extinguishment[68] - The Senior Credit Facility was amended and restated, extending its maturity to September 13, 2026, and providing $708.6 million in available borrowings as of September 30, 2021[69][70] Note 8. Fair Value This note discusses the fair value measurements of financial instruments, particularly derivative instruments and senior notes - Fair value measurements of derivative instruments are determined using models that maximize observable market inputs and are classified as Level II under the fair value hierarchy[71] - The estimated fair value of Senior Notes at September 30, 2021, was $1,850.5 million compared to a carrying value of $1,786.1 million, based on Level I quoted market rates[71] Note 9. Inventories This note presents a detailed breakdown of inventories, net, including raw materials, work in process, and finished goods Inventories, net (as of September 30, 2021 and December 31, 2020) | Item | Sep 30, 2021 ($ thousands) | Dec 31, 2020 ($ thousands) | | :------------------------ | :------------------------- | :------------------------- | | Raw materials | 329,609 | 321,600 | | Work in process | 263,545 | 210,174 | | Finished goods | 199,876 | 221,532 | | Less: Excess and obsolete reserve | (94,984) | (86,078) | | Inventories, net | 698,046 | 667,228 | Note 10. Earnings Per Share This note provides the calculation of basic and diluted earnings per common share for the reported periods Earnings Per Common Share (Three Months Ended September 30) | Metric | 2021 ($) | 2020 ($) | | :-------- | :------- | :------- | | Basic EPS | 0.38 | 0.43 | | Diluted EPS | 0.38 | 0.43 | Earnings Per Common Share (Nine Months Ended September 30) | Metric | 2021 ($) | 2020 ($) | | :-------- | :------- | :------- | | Basic EPS | 0.84 | 0.57 | | Diluted EPS | 0.83 | 0.57 | - The denominator for diluted earnings per common share for the nine months ended September 30, 2021, was 130,867 thousand shares[74] Note 11. Legal Matters and Contingencies This note outlines the company's involvement in legal proceedings, including asbestos-related lawsuits and associated expenses - Flowserve is a defendant in a substantial number of asbestos-related lawsuits, with 8,621 active claims as of September 30, 2021[77] Asbestos Claim Expenses (Net of Insurance) | Period | Expenses ($ millions) | | :-------------------------------------- | :-------------------- | | Three months ended September 30, 2021 | 5.6 | | Three months ended September 30, 2020 | 2.4 | | Nine months ended September 30, 2021 | 10.1 | | Nine months ended September 30, 2020 | 9.0 | - The company believes a substantial majority of existing asbestos claims should continue to be covered by insurance or indemnities[77] Note 12. Retirement and Postretirement Benefits This note details the net periodic cost for the company's U.S. and non-U.S. defined benefit plans and postretirement medical benefits Net Periodic Cost for Retirement and Postretirement Benefits (Three Months Ended September 30, 2021) | Plan Type | Net Periodic Cost ($ millions) | | :------------------------ | :----------------------------- | | U.S. Defined Benefit Plans | 4.8 | | Non-U.S. Benefit Plans | 2.7 | | Postretirement Medical Benefits | 0.1 | Net Periodic Cost for Retirement and Postretirement Benefits (Nine Months Ended September 30, 2021) | Plan Type | Net Periodic Cost ($ millions) | | :------------------------ | :----------------------------- | | U.S. Defined Benefit Plans | 14.7 | | Non-U.S. Benefit Plans | 8.5 | | Postretirement Medical Benefits | 0.4 | Note 13. Shareholders' Equity This note provides information on dividends declared per share and share repurchase activities Dividends Declared Per Share | Period | 2021 ($) | 2020 ($) | | :-------------------------------------- | :------- | :------- | | Three Months Ended September 30 | 0.20 | 0.20 | | Nine Months Ended September 30 | 0.60 | 0.60 | - Repurchased 440,000 shares for $17.5 million during the nine months ended September 30, 2021[83] - As of September 30, 2021, $96.1 million of remaining capacity was available under the current share repurchase program[83] Note 14. Income Taxes This note presents details on income taxes, including earnings before taxes, provision for income taxes, and the effective tax rate Income Taxes and Effective Tax Rate | Period | Earnings Before Taxes ($ millions) | Provision for (benefit from) Income Taxes ($ millions) | Effective Tax Rate | | :-------------------------------------- | :--------------------------------- | :----------------------------------------------------- | :----------------- | | Three Months Ended September 30, 2021 | 41.4 | (10.4) | (25.2)% | | Three Months Ended September 30, 2020 | 78.0 | 19.2 | 24.6% | | Nine Months Ended September 30, 2021 | 112.8 | (3.9) | (3.5)% | | Nine Months Ended September 30, 2020 | 141.9 | 60.7 | 42.7% | - The effective tax rate varied from the U.S. federal statutory rate primarily due to the net impact of foreign operations, reversal of certain deferred tax liabilities from legal entity restructuring, and favorable resolution of audits in foreign jurisdictions[84] - The company estimates a potential reduction in tax expense of approximately $12 million within the next 12 months due to audit resolutions and statute of limitations closures[84] Note 15. Segment Information This note disaggregates financial information by the company's two reportable segments: Flowserve Pump Division (FPD) and Flow Control Division (FCD) - Flowserve operates through two reportable segments: Flowserve Pump Division (FPD) and Flow Control Division (FCD)[86] Segment Sales and Operating Income (Three Months Ended September 30, 2021) | Segment | Sales to external customers ($ thousands) | Segment operating income ($ thousands) | | :------ | :---------------------------------------- | :------------------------------------- | | FPD | 601,108 | 59,071 | | FCD | 265,010 | 27,743 | | Total | 866,118 | 86,814 | Segment Sales and Operating Income (Nine Months Ended September 30, 2021) | Segment | Sales to external customers ($ thousands) | Segment operating income ($ thousands) | | :------ | :---------------------------------------- | :------------------------------------- | | FPD | 1,820,708 | 180,698 | | FCD | 800,896 | 89,685 | | Total | 2,621,604 | 270,383 | Note 16. Accumulated Other Comprehensive Income (Loss) This note provides a breakdown of accumulated other comprehensive loss by component, including foreign currency translation and pension effects Accumulated Other Comprehensive Loss (AOCL) (as of September 30, 2021) | Component | Amount ($ thousands) | | :-------------------------------------- | :------------------- | | Foreign currency translation items | (468,889) | | Pension and other postretirement effects | (135,450) | | Cash flow hedging activity | (1,618) | | Total AOCL | (605,957) | - Net current-period other comprehensive loss for the three months ended September 30, 2021, was $(11,953) thousand, primarily due to foreign currency translation adjustments[90] - Net current-period other comprehensive loss for the nine months ended September 30, 2021, was $(2,309) thousand, a decrease from $(50,226) thousand in the prior year[93] Note 17. Realignment and Transformation Programs This note details the charges and objectives of the 2020 Realignment Program and the Flowserve 2.0 Transformation efforts - The 2020 Realignment Program was initiated to right-size organizational operations and reduce workforce costs, with an anticipated total investment of approximately $95 million[97] Total Realignment Charges (Three Months Ended September 30) | Item | 2021 ($ thousands) | 2020 ($ thousands) | | :--- | :----------------- | :----------------- | | COS | 2,582 | 5,658 | | SG&A | 368 | 6,519 | | Total | 2,950 | 12,177 | Total Realignment Charges (Nine Months Ended September 30) | Item | 2021 ($ thousands) | 2020 ($ thousands) | | :--- | :----------------- | :----------------- | | COS | 15,813 | 40,636 | | SG&A | 6,453 | 47,688 | | Total | 22,266 | 88,324 | - The Flowserve 2.0 Transformation efforts were substantially completed by December 31, 2020, with no charges incurred in the first nine months of 2021[97] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on Flowserve Corporation's financial condition and results of operations, covering an executive overview, COVID-19 impact, operating results, liquidity, and critical accounting policies - The discussion should be read in conjunction with the condensed consolidated financial statements and the 2020 Annual Report on Form 10-K[113] Executive Overview This section provides an overview of Flowserve's business as a leading manufacturer and aftermarket service provider of flow control systems - Flowserve is a world-leading manufacturer and aftermarket service provider of comprehensive flow control systems, serving global infrastructure industries such as oil and gas, chemical, power generation, and water management[114] - The company operates through two business segments: Flowserve Pump Division (FPD) and Flow Control Division (FCD), both focused on industrial flow control technology[116] - Aftermarket sales and services, provided through a global network of 163 Quick Response Centers (QRCs), are a key component of the business strategy, offering higher margins and business stability[114] - Flowserve is focused on enhancing global supply chain capabilities and improving on-time delivery and quality through a Continuous Improvement Process (CIP) initiative[116] COVID-19 Update This section discusses the ongoing impact of the COVID-19 pandemic on the company's operations, supply chain, and customer spending - The COVID-19 pandemic continues to cause substantial economic uncertainty and challenging operational conditions, including significant labor availability issues in Q3 2021 due to higher quarantine rates and a tighter labor market[117][118][123] - Customer maintenance, repair, and overhaul (MRO) and aftermarket spending have returned close to pre-pandemic levels, but project-based capital expenditures have not yet fully recovered[121] - Global supply chain and logistics constraints have led to production and shipping delays, increased costs, and impacts on timely product delivery, contributing to an increase in backlog[122] - Supply chain, logistics, and labor availability headwinds shifted approximately $60 million of expected revenue out of Q3 2021 and impacted operating income as a percent of sales by approximately 150 basis points[125] - Flowserve expects full-year bookings in 2021 to increase roughly 10% compared to 2020 levels, with Q4 bookings projected to be the highest quarterly level in 2021[125] Results of Operations (Three and Nine Months) This section analyzes the company's operating results, including bookings, sales, gross profit, and net earnings, for the three and nine months ended September 30, 2021 and 2020 - The 2020 Realignment Program achieved approximately $78 million in cost savings for the nine months ended September 30, 2021, with expected full-year run-rate savings of approximately $125 million upon completion[126] Bookings and Sales (Three Months Ended September 30) | Metric | 2021 ($ millions) | 2020 ($ millions) | Change (%) | | :----- | :---------------- | :---------------- | :--------- | | Bookings | 911.6 | 806.1 | 13.1% | | Sales | 866.1 | 924.3 | (6.3%) | Gross Profit and SG&A (Three Months Ended September 30) | Metric | 2021 ($ millions) | 2020 ($ millions) | Change (%) | | :--------------------- | :---------------- | :---------------- | :--------- | | Gross profit | 253.5 | 285.2 | (11.1%) | | Gross profit margin | 29.3% | 30.9% | (1.6 pp) | | SG&A | 200.9 | 200.7 | 0.1% | | SG&A as % of sales | 23.2% | 21.7% | 1.5 pp | Operating Income and Net Earnings from Affiliates (Three Months Ended September 30) | Metric | 2021 ($ millions) | 2020 ($ millions) | Change (%) | | :------------------------- | :---------------- | :---------------- | :--------- | | Operating income | 57.4 | 87.3 | (34.2%) | | Net earnings from affiliates | 4.7 | 2.8 | 67.9% | - Backlog increased by $115.0 million (6.2%) to $1,969.9 million at September 30, 2021, compared to December 31, 2020, with approximately 39% related to aftermarket orders[131] - The effective tax rate for the three months ended September 30, 2021, was (25.2)% (a benefit), compared to 24.6% (a provision) in 2020, primarily due to foreign operations and legal entity restructuring[150] Flowserve Pump Division Segment Results This section details the financial performance of the Flowserve Pump Division (FPD) segment, including bookings, sales, and operating income - FPD designs, manufactures, distributes, and services highly custom engineered pumps, industrial pumps, pump systems, mechanical seals, and auxiliary systems[156] FPD Key Financials (Three Months Ended September 30) | Metric | 2021 ($ millions) | 2020 ($ millions) | Change (%) | | :--------------------- | :---------------- | :---------------- | :--------- | | Bookings | 660.9 | 574.1 | 15.1% | | Sales | 601.8 | 670.2 | (10.2%) | | Gross profit | 182.9 | 210.0 | (12.9%) | | Gross profit margin | 30.4% | 31.3% | (0.9 pp) | | Segment operating income | 59.1 | 86.7 | (31.8%) | - Bookings increase was driven by increased orders in the oil and gas, chemical, and power generation industries, primarily in North America and the Middle East[157] - Sales decrease was primarily due to customer original equipment sales, with declines in Asia Pacific, Europe, and North America[157] - FPD backlog increased by $102.3 million (8.3%) to $1,339.2 million at September 30, 2021[159] Flow Control Division Segment Results This section presents the financial performance of the Flow Control Division (FCD) segment, including bookings, sales, and operating income - FCD designs, manufactures, and distributes a broad portfolio of engineered-to-order and configured-to-order isolation valves, control valves, and valve automation products[160] FCD Key Financials (Three Months Ended September 30) | Metric | 2021 ($ millions) | 2020 ($ millions) | Change (%) | | :--------------------- | :---------------- | :---------------- | :--------- | | Bookings | 253.6 | 237.6 | 6.7% | | Sales | 266.1 | 255.2 | 4.3% | | Gross profit | 77.0 | 78.1 | (1.4%) | | Gross profit margin | 28.9% | 30.6% | (1.7 pp) | | Segment operating income | 27.7 | 30.8 | (10.1%) | - Bookings increase was primarily driven by increased orders in the general and water industries, weighted towards original equipment bookings[163] - Sales increase was driven by both original equipment and aftermarket sales, particularly in Asia Pacific[163] - FCD backlog increased by $13.8 million (2.2%) to $636.9 million at September 30, 2021[165] Liquidity and Capital Resources This section discusses the company's liquidity position, cash flow activities, and available capital resources - Existing cash, cash generated by operations, and borrowings available under the Senior Credit Facility are the primary sources of short-term liquidity[166] Cash Flow and Liquidity Analysis This section analyzes the company's cash flow activities from operations, investing, and financing, and its overall liquidity Cash Flow Summary (Nine Months Ended September 30) | Cash Flow Activity | 2021 ($ millions) | 2020 ($ millions) | | :------------------------------------------------ | :---------------- | :---------------- | | Net cash flows provided (used) by operating activities | 151.1 | 114.3 | | Net cash flows provided (used) by investing activities | (38.7) | (32.7) | | Net cash flows provided (used) by financing activities | 272.3 | 178.9 | - Cash and cash equivalents increased by $362.0 million to $1,457.3 million at September 30, 2021[166] - Operating cash flow increased due to decreased cash flows used or increased cash flows provided by inventories, contract assets, and contract liabilities[166] - Financing activities were significantly impacted by $498.3 million from 2032 Senior Notes issuance and $300.0 million from a term loan, partially offset by $407.5 million in debt payments[168] - The company expects cash flows from operations, combined with available capacity under its Senior Credit Facility ($708.6 million), and existing cash balance, to be sufficient for the next 12 months[168] Financing This section provides details on the company's financing activities and compliance with financial covenants - Flowserve was in compliance with all applicable financial covenants under its Senior Credit Facility as of September 30, 2021[169] COVID-19 Liquidity Update This section provides an update on the company's liquidity position in the context of the ongoing COVID-19 pandemic - As of September 30, 2021, Flowserve had approximately $2.2 billion of liquidity, consisting of $1,457.3 million in cash and cash equivalents and $708.6 million in available borrowings under its Senior Credit Facility[171] - After giving effect to the October 12, 2021, redemption of Senior Notes, liquidity was approximately $1.3 billion ($615.2 million cash and $708.6 million available borrowings)[171] - The company anticipates maintaining sufficient liquidity throughout 2021, supported by planned and in-place cost savings measures[171] Critical Accounting Policies and Estimates This section highlights the critical accounting policies and estimates that require significant management judgment - Critical accounting policies and estimates, including Revenue Recognition, Deferred Taxes, Reserves for Contingent Loss, Retirement and Postretirement Benefits, and Valuation of Goodwill and Other Long-Lived Assets, remain consistent with those discussed in the 2020 Annual Report[172] - No significant changes have occurred in these critical accounting policies and estimates during the nine months ended September 30, 2021[172] Accounting Developments This section provides information on recent accounting pronouncements and their impact on the financial statements - Information about pronouncements not yet implemented is presented in Note 1 to the condensed consolidated financial statements[174] Cautionary Note Regarding Forward-Looking Statements This section warns readers about the inherent risks and uncertainties associated with forward-looking statements in the report - This Quarterly Report includes forward-looking statements subject to numerous risks and uncertainties that could cause actual results to differ materially from forecasts[175] - Key risks include the impact of the COVID-19 pandemic, changes in global financial markets, dependence on customer capital expenditures, execution of strategic initiatives, raw material price volatility, international operational risks, foreign currency fluctuations, litigation (e.g., asbestos claims), and cybersecurity threats[176][177] Item 3. Quantitative and Qualitative Disclosures About Market Risk Flowserve is exposed to market risks primarily from foreign currency exchange rate movements and the ongoing transition away from LIBOR. The company employs hedging strategies, including foreign exchange forward contracts and cross-currency swaps, to mitigate currency risks. While the LIBOR transition is being managed, a 10% change in foreign currency exchange rates could significantly impact net earnings - Market risk exposure arises from changes in foreign currency exchange rate movements and the transition away from LIBOR[179] - The London Interbank Offered Rate (LIBOR) is ceasing or losing representativeness, with the U.S. Federal Reserve proposing the Secured Overnight Financing Rate (SOFR) as a replacement. The company's credit agreement includes a transition clause for a successor LIBOR rate[180] - Flowserve uses foreign exchange forward contracts (notional value of $361.3 million at September 30, 2021) and cross-currency swaps (€423.2 million notional value at September 30, 2021) as net investment hedges to manage foreign currency risk[181] - A 10% change in foreign currency exchange rates for the nine months ended September 30, 2021, would have impacted net earnings by approximately $14 million[182] Item 4. Controls and Procedures Flowserve's management, including the Principal Executive Officer and Principal Financial Officer, evaluated the effectiveness of the company's disclosure controls and procedures and concluded they were effective as of September 30, 2021. No material changes in internal control over financial reporting occurred during the quarter - Disclosure controls and procedures were effective as of September 30, 2021[184] - There have been no material changes in internal control over financial reporting during the quarter ended September 30, 2021[185] PART II – OTHER INFORMATION Item 1. Legal Proceedings Flowserve is involved in various legal proceedings, including asbestos-related claims detailed in Note 11 of the financial statements, and other routine lawsuits incidental to its business. Management does not anticipate these matters, individually or in aggregate, will have a material adverse effect on the company's financial position, results of operations, or cash flows - Flowserve is a party to legal proceedings described in Note 11, including asbestos-related claims[190] - Management does not expect current legal matters to have a material adverse effect on the company's financial position, results of operations, or cash flows[190] Item 1A. Risk Factors This section states that there have been no material changes to the risk factors previously disclosed in Flowserve's 2020 Annual Report on Form 10-K and subsequent SEC filings. The company advises readers to carefully consider these factors, acknowledging that new, currently unknown risks may emerge in the future - No material changes in risk factors have occurred since the 2020 Annual Report and subsequent SEC filings[191] - Readers should refer to 'Item 1A. Risk Factors' in Part I of the 2020 Annual Report for a comprehensive discussion of significant factors affecting the business[191] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Flowserve did not repurchase any common stock shares under its publicly announced share repurchase program during the quarter ended September 30, 2021. As of that date, $96.1 million remained available under the $500.0 million authorization. The section also notes shares tendered by employees for tax withholding and shares purchased by a rabbi trust for director deferral plans - No repurchases of common stock shares were made under the publicly announced share repurchase program during the quarter ended September 30, 2021[192] - As of September 30, 2021, $96.1 million of remaining capacity was available under the $500.0 million share repurchase authorization[192] - Other share activity included shares tendered by employees to satisfy minimum tax withholding for Restricted Shares and shares purchased by a rabbi trust for director deferral plans[192][193] Item 3. Defaults Upon Senior Securities No defaults upon senior securities were reported for the period - None[196] Item 4. Mine Safety Disclosures This item is not applicable to Flowserve Corporation - Not applicable[197] Item 5. Other Information No other information was reported for the period - None[199] Item 6. Exhibits This section provides a comprehensive list of all exhibits filed with the Form 10-Q, including organizational documents, various indentures, the amended and restated credit agreement, certifications from executive officers, and XBRL (eXtensible Business Reporting Language) related documents - Exhibits include Restated Certificate of Incorporation, By-Laws, Senior Indentures (4.1-4.6), Amended and Restated Credit Agreement (10.1), Certifications of Principal Executive and Financial Officers (31.1+, 31.2+, 32.1++, 32.2++), and XBRL Instance and Taxonomy Extension Documents (101.INS, 101.SCH, 101.CAL, 101.LAB, 101.PRE, 101.DEF)[200] Signatures The Quarterly Report on Form 10-Q was duly signed on October 27, 2021, by Amy B. Schwetz, Senior Vice President and Chief Financial Officer, and Scott K. Vopni, Vice President and Chief Accounting Officer, on behalf of Flowserve Corporation - The report was signed by Amy B. Schwetz (Senior Vice President and Chief Financial Officer) and Scott K. Vopni (Vice President and Chief Accounting Officer)[203] - The signing date was October 27, 2021[203]