FLOWSERVE CORPORATION
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our condensed consolidated
financial statements and notes thereto, and the other financial data included
elsewhere in this Quarterly Report. The following discussion should also be read
in conjunction with our audited consolidated financial statements, and notes
thereto, and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" ("MD&A") included in our 2019 Annual Report.
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EXECUTIVE OVERVIEW
Our Company
We are a world-leading manufacturer and aftermarket service provider of
comprehensive flow control systems. We develop and manufacture
precision-engineered flow control equipment integral to the movement, control
and protection of the flow of materials in our customers' critical processes.
Our product portfolio of pumps, valves, seals, automation and aftermarket
services supports global infrastructure industries, including oil and gas,
chemical, power generation and water management, as well as general industrial
markets where our products and services add value. Through our manufacturing
platform and global network of Quick Response Centers ("QRCs"), we offer a broad
array of aftermarket equipment services, such as installation, advanced
diagnostics, repair and retrofitting. We currently employ approximately 16,000
employees in more than 50 countries.
Our business model is significantly influenced by the capital and operating
spending of global infrastructure industries for the placement of new products
into service and aftermarket services for existing operations. The worldwide
installed base of our products is an important source of aftermarket revenue,
where products are expected to ensure the maximum operating time of many key
industrial processes. We have significantly invested in our aftermarket strategy
to provide local support to drive customer investments in our offerings and use
of our services to replace or repair installed products. The aftermarket portion
of our business also helps provide business stability during various economic
periods. The aftermarket service and solutions business, which is primarily
served by our network of 165 QRCs located around the globe, provides a variety
of service offerings for our customers including spare parts, service solutions,
product life cycle solutions and other value-added services. It is generally a
higher margin business compared to our original equipment business and a key
component of our business strategy.
Our operations are conducted through two business segments that are referenced
throughout this MD&A:
•Flowserve Pump Division ("FPD") for custom, highly-engineered pumps,
pre-configured industrial pumps, pump systems, mechanical seals, auxiliary
systems and replacement parts and related services; and
•Flow Control Division ("FCD") for engineered and industrial valves, control
valves, actuators and controls and related services.
Our business segments share a focus on industrial flow control technology and
have a number of common customers. These segments also have complementary
product offerings and technologies that are often combined in applications that
provide us a net competitive advantage. Our segments also benefit from our
global footprint and our economies of scale in reducing administrative and
overhead costs to serve customers more cost effectively. For example, our
segments share leadership for operational support functions, such as sales,
research and development, marketing and supply chain.
The reputation of our product portfolio is built on more than 50 well-respected
brand names such as Worthington, IDP, Valtek , Limitorque, Durco, Argus, Edward,
Valbart and Durametallic, which we believe to be one of the most comprehensive
in the industry. Our products and services are sold either directly or through
designated channels to more than 10,000 companies, including some of the world's
leading engineering, procurement and construction ("EPC") firms, original
equipment manufacturers, distributors and end users.
We continue to leverage our QRC network to be positioned as near to customers as
possible for service and support in order to capture valuable aftermarket
business. Along with ensuring that we have the local capability to sell, install
and service our equipment in remote regions, it is equally imperative to
continuously improve our global operations. Despite recent headwinds caused by
the COVID-19 pandemic, we continue to enhance our global supply chain capability
to increase our ability to meet global customer demands and improve the quality
and timely delivery of our products over the long-term. Additionally, we
continue to devote resources to improving the supply chain processes across our
business segments to find areas of synergy and cost reduction and to improve our
supply chain management capability to meet global customer demands. We also
remain focused on improving on-time delivery and quality, while managing
warranty costs as a percentage of sales across our global operations, through
the assistance of a focused Continuous Improvement Process ("CIP") initiative.
The goal of the CIP initiative, which includes lean manufacturing, six sigma
business management strategy and value engineering, is to maximize service
fulfillment to customers through on-time delivery, reduced cycle time and
quality at the highest internal productivity.
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COVID-19 Update
The COVID-19 pandemic continues to have an impact on human health, the global
economy and society at large. The pandemic is expected to continue to adversely
impact, for its duration, our operations and financial performance. In response,
we continue to actively monitor the impacts of the COVID-19 pandemic on all
aspects of our business and geographies. Our cross-functional crisis management
team established during the first quarter of 2020 has continued monitoring and
making recommendations to management to help us continue operating as an
essential business, while also protecting the health and safety of our
associates.
Despite our evolving response, the COVID-19 pandemic has had an adverse effect
on our performance during the nine months of 2020, which we expect will continue
through at least the remainder of 2020. While we cannot reasonably estimate with
certainty the duration and severity of the COVID-19 pandemic or its ultimate
impact on the global economy, our business or our financial condition and
results, we nonetheless remain committed to providing the critical support,
products and services that our customers rely on, and currently believe that we
will emerge from these events well positioned for long-term growth.
Health and Safety of Our Associates
The health and safety of our associates, suppliers and customers around the
world continues to be our first priority as we continue to navigate the COVID-19
pandemic, including recent spikes in cases in various geographies in which we
operate. We are incredibly proud of the great teamwork exhibited by our global
workforce who have demonstrated strong resilience in adapting to continually
evolving health and safety guidelines while addressing these challenging times
and providing products and services to our customers.
We have implemented policies and practices to help protect our workforce so they
can safely and effectively carry out their vital work, and we have continued to
revise those policies and practices in light of guidance received from local and
regional health authorities where appropriate. We instituted global restrictions
on non-essential travel in March 2020 and the work-from-home policy for all
non-essential employees who are able to do so has continued in effect in
locations where health officials have advised such policies, including for our
global headquarters in Irving, Texas , which will maintain its work-from-home
policy at least through the end of 2020. In those locations where employees are
going to work in our facilities, we have continued taking steps, consistent with
guidelines from local and global health experts to protect our employees so that
we can continue to manufacture critical technologies and equipment, including
providing face coverings and other personal protective equipment, enhanced
cleaning of sites and implemented social distancing protocols.
Our employees and facilities have a key role in keeping essential infrastructure
and industries operating, including oil and gas, water, chemical, power
generation and other essential industries, such as food and beverage and
healthcare. While some of our facilities have experienced periods of temporary
closures during the first six months of 2020 in accordance with decrees, orders
and laws in their respective countries and geographies, as of November 13, 2020 ,
all of our facilities are open and operational, and are running close to
pre-COVID-19 levels as we continue to make essential products and provide
services for our customers. However, the measures described above, combined with
continued employee costs and under-absorption of manufacturing costs as a result
of temporary closures and work-from-home policies, have had and are expected to
continue having an adverse impact on our financial performance throughout the
remainder of the pandemic.
Customer Demand
During the first nine months of 2020, the COVID-19 pandemic's reduction in
global demand for oil and gas, coupled with excessive supply due to
disagreements between the Organization of Petroleum Exporting Countries ("OPEC")
and other oil producing nations in the first half of 2020, led to extreme
volatility in global markets and in oil prices. These conditions have adversely
impacted our customers, particularly in the oil and gas markets. For example, in
the first half of 2020, these conditions drove a significant and broad-based
decrease in customer planned capital spending, leading many of our large
customers to announce double-digit capital expenditure budget decreases for the
remainder of 2020. As a result, we saw overall bookings decline by 21.2% in the
third quarter of 2020 as compared to the same period in 2019, resulting in a
lower sequential backlog, though we have not seen a significant increase in the
levels of customer cancellations in our existing backlog.
Additionally, the rapidly evolving impacts of the COVID-19 pandemic have caused
reduced activity levels in our aftermarket business in the first nine months of
2020 due to deferred spending of our customers' repair and maintenance budgets,
including the impact of restricted access to our customers' facilities. While we
expect that these repair and maintenance projects will ultimately need to be
completed, the timing will largely depend on the duration of the COVID-19
pandemic and how the virus continues to spread in our customer's various
geographies.
These trends are likely to continue during the duration of the COVID-19 pandemic
as various actions implemented to combat the pandemic will continue to reduce
demand for oil and gas. As a result, we have experienced decreased bookings,
sales and financial performance and anticipate this continuing throughout the
remainder of the pandemic. Additionally, we
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expect the headwinds in the oil and gas markets that have resulted in, and are
likely to continue to result in, reduced capital expenditures and bookings for
oil and gas customers to continue at least until oil demand and prices
stabilize, which may not occur until after the pandemic subsides.
Supply Chain Impact
Since the onset of the pandemic, many of our suppliers have also experienced
varying lengths of production and shipping conditions related to the COVID-19
pandemic, some of which continue to exist in highly affected countries. These
conditions have had an adverse effect on the speed at which we can manufacture
and ship our products to customers, and have also led to an increase in
logistics, transportation and freight costs, requiring that we diversify our
supply chain and, in some instances, source materials from new suppliers.
Additionally, these conditions have in some cases impacted our ability to
deliver products to customers on time, which has in turn led to an increase in
backlog at some of our manufacturing sites. Though some of these issues have
abated as the year has progressed, certain disruptions in our supply chain and
their effects have continued through the third and fourth quarter of 2020 and we
expect they will continue as the COVID-19 pandemic continues.
Operational Impacts
We have also engaged in a number of cost savings measures in order to help
mitigate certain of the adverse effects of the COVID-19 pandemic on our
financial results, including certain realignment activities (further described
below under "-RESULTS OF OPERATIONS - Three and nine months ended September 30,
2020 and 2019"), a freeze on all non-essential open employment requisitions,
cancellation of merit-based payroll increases for 2020, reduction of capital
expenditures to approximately $60 million and cuts in other discretionary
spending. Together, we are planning approximately $100 million of cost
reductions, excluding realignment charges, in 2020 as compared to 2019, due in
large part to our response to the effects of COVID-19, which partially offsets
the increased costs and operational impacts of the safety protocols and
procedures that we have implemented as described above under the heading
"-Health and Safety of Our Associates." We continue to evaluate additional cost
savings measures and will continue to implement such measures in the near term
in order to reduce the impact of the COVID-19 pandemic on our financial results.
We continually monitor and assess the spread of COVID-19, including in areas
that have seen recent increases in cases, and we will continue to adapt our
operations to respond the changing conditions as needed. As we continue to
manage our business through this unprecedented time of uncertainty and market
volatility, we will remain focused on the health and safety of our associates,
suppliers, customers, and will continue to provide essential products and
services to our customers.
2020 Outlook
As the headwinds experienced during the first nine months of 2020 continue to
impact our business, we expect to see an approximately 20% decline in bookings
in the fourth quarter of 2020 as compared to the same period in 2019, with
slightly less of an impact on revenue, which we expect will decline
approximately 10% as compared to the same period in 2019. Despite these effects,
however, we expect to be able to maintain adequate liquidity over the next 12
months as we manage through the current market environment. As of September 30,
2020 , we had approximately $1.7 billion of liquidity, consisting of cash and
cash equivalents of $921.2 million and $745.9 million of borrowings available
under our Senior Credit Facility. We will continue to actively monitor the
potential impacts of COVID-19 and related events on the credit markets in order
to maintain sufficient liquidity and access to capital throughout the remainder
of 2020 and 2021.
RESULTS OF OPERATIONS - Three months ended
Throughout this discussion of our results of operations, we discuss the impact
of fluctuations in foreign currency exchange rates. We have calculated currency
effects on operations by translating current year results on a monthly basis at
prior year exchange rates for the same periods.
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In conjunction with our close process for the third quarter of 2020, we
identified accounting errors related to the recognition of a liability for
unasserted asbestos claims. The adjustments primarily related to an incurred but
not reported ("IBNR") liability associated with unasserted asbestos claims, but
also included adjustments related to the associated receivables for expected
insurance proceeds for asbestos settlement and defense costs from insurance
coverage and the recognition as an expense the related legal fees that were
previously estimated to be recoverable from insurance carriers for which
coverage is not currently sufficient following the recognition of the IBNR for
periods beginning with the year ended December 31, 2014 through the second
quarter of 2020 and to correct certain other previously identified immaterial
errors. These errors, individually and in the aggregate, are not material to any
prior annual or interim period. However, the aggregate amount of the prior
period errors would have been material to our current interim condensed
consolidated statements of income and to our anticipated full year results and
therefore, we have revised our previously issued financial information for the
three and nine months ended September 30, 2019 , as discussed in Note 2 to our
condensed consolidated financial statements included in this Quarterly Report.
In the second quarter of 2018, we launched and committed resources to our
Flowserve 2.0 Transformation, a program designed to transform our business model
to drive operational excellence, reduce complexity, accelerate growth, improve
organizational health and better leverage our existing global platform, which is
further discussed in Note 17 to our condensed consolidated financial statements
included in this Quarterly Report. We anticipate that the Flowserve 2.0
Transformation will result in further restructuring charges, non-restructuring
charges and other related transformation expenses. The Flowserve 2.0
Transformation expenses incurred primarily consist of professional services,
project management and related travel costs recorded in SG&A expenses.
In the second quarter of 2020, we identified and initiated certain realignment
activities resulting from our Flowserve 2.0 Transformation Program to right-size
our organizational operations based on the current business environment, with
the overall objective to reduce our workforce costs. We anticipate a total
investment in 2020 Realignment Program activities of approximately $75 million
and that the majority of the remaining charges will be incurred through the
remainder of 2020. Based on actions initiated in the second quarter of 2020, we
estimate that we have achieved cost savings of approximately $14 million as of
September 30, 2020 , with approximately $5 million of those savings in COS and
approximately $9 million in SG&A. Upon completion of the 2020 Realignment
Program activities, we expect full year run-rate cost savings of approximately
$100 million . Actual savings could vary from expected savings, which represent
management's best estimate to date. There are certain other realignment
activities that are currently being evaluated, but have not yet been finalized.
The realignment programs initiated in 2015 ("2015 Realignment Programs"), which
consisted of both restructuring and non-restructuring charges, were
substantially complete as of March 31, 2020 , resulting in $362.4 million of
total charges incurred through the completion of the programs.
Realignment Activity
The total charges incurred in 2020 related to our 2020 Realignment Program
activities and Flowserve 2.0 Transformation by segment and the charges incurred
in 2019 related to our 2015 Realignment Programs and Flowserve 2.0
Transformation by segment are presented in the following tables:
Three Months Ended
Subtotal-Reportable Eliminations and
(Amounts in thousands) FPD FCD Segments All Other Consolidated Total
Total Realignment and
Transformation Charges
COS $ 6,679 $ (776) $ 5,903 $ (245) $ 5,658
SG&A 1,087 73 1,160 5,359 6,519
Total $ 7,766 $ (703) $ 7,063 $ 5,114 $ 12,177
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Three Months Ended
Subtotal-Reportable Eliminations and
(Amounts in thousands) FPD FCD Segments All Other Consolidated Total
Total Realignment and
Transformation Charges
COS $ 2,606 $ 814 $ 3,420 $ - $ 3,420
SG&A 380 $ - 380 6,052 6,432
Total $ 2,986 $ 814 $ 3,800 $ 6,052 $ 9,852
Nine Months Ended
Subtotal-Reportable Eliminations and
(Amounts in thousands) FPD FCD Segments All Other Consolidated Total
Total Realignment and
Transformation Charges
COS $ 32,139 $ 8,194 $ 40,333 $ 303 $ 40,636
SG&A 11,120 $ 4,454 15,574 32,114 47,688
Total $ 43,259 $ 12,648 $ 55,907 $ 32,417 $ 88,324
Nine Months Ended
Subtotal-Reportable Eliminations and
(Amounts in thousands) FPD FCD Segments All Other Consolidated Total
Total Realignment and
Transformation Charges
COS $ 11,423 $ 1,363 $ 12,786 $ - $ 12,786
SG&A(1) (16,302) 447 (15,855) 23,281 7,426
Total $ (4,879) $ 1,810 $ (3,069) $ 23,281 $ 20,212
_______________________________
(1) Primarily consists of gains from the sales of non-strategic manufacturing facilities that were included in our 2015 Realignment Programs.
Consolidated Results
Bookings, Sales and Backlog
Three Months Ended September 30,
(Amounts in millions) 2020 2019
Bookings $ 806.1 $ 1,023.4
Sales 924.3 995.7
Nine Months Ended September 30,
(Amounts in millions) 2020 2019
Bookings $ 2,587.3 $ 3,188.4
Sales 2,742.8 2,871.5
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-------------------------------------------------------------------------------- Table of Co ntents We define a booking as the receipt of a customer order that contractually engages us to perform activities on behalf of our customer with regard to manufacturing, service or support. Bookings recorded and subsequently canceled within the year-to-date period are excluded from year-to-date bookings. Bookings for the three months endedSeptember 30, 2020 decreased by$217.3 million , or 21.2%, as compared with the same period in 2019. The decrease included currency benefits of approximately$4 million . The decrease was driven by lower customer bookings in the oil and gas, chemical, power generation and water management industries, partially offset by increased bookings in the general industries. Customer bookings were down in both aftermarket and original equipment, which have decreased in light of the impacts of COVID-19 on customer spending and distressed oil prices on these industries. Bookings for the nine months endedSeptember 30, 2020 decreased by$601.1 million , or 18.9%, as compared with the same period in 2019. The decrease included negative currency effects of approximately$36 million . The decrease was driven by lower bookings in the oil and gas, chemical, power generation and water management industries, partially offset by increased bookings in the general industries. Customer bookings were down in both aftermarket and original equipment, which have decreased in light of the impacts of COVID-19 on customer spending and distressed oil prices on these industries. Sales for the three months endedSeptember 30, 2020 decreased by$71.4 million , or 7.2%, as compared with the same period in 2019. The decrease included currency benefits of approximately$5 million . The decreased sales were driven by both original equipment and aftermarket sales, with decreased sales intoNorth America ,Latin America andAsia Pacific , partially offset by increased sales into theMiddle East andEurope . Net sales to international customers, including export sales from theU.S. , were approximately 68% and 63% of total sales for the three months endedSeptember 30, 2020 and 2019, respectively. Sales for the nine months endedSeptember 30, 2020 decreased by$128.7 million , or 4.5%, as compared with the same period in 2019. The decrease included negative currency effects of approximately$34 million . The decreased sales were primarily driven by aftermarket sales, with decreased sales intoNorth America ,Europe ,Asia Pacific ,Africa andLatin America , partially offset by increased sales into theMiddle East . Net sales to international customers, including export sales from theU.S. , were approximately 65% and 63% of total sales for the nine months endedSeptember 30, 2020 and 2019, respectively. Backlog represents the aggregate value of booked but uncompleted customer orders and is influenced primarily by bookings, sales, cancellations and currency effects. Backlog of$1,980.1 million atSeptember 30, 2020 decreased by$176.9 million , or 8.2%, as compared withDecember 31, 2019 . Currency effects provided an increase of approximately$1 million . Approximately 36% and 33% of the backlog atSeptember 30, 2020 andDecember 31, 2019 , respectively, was related to aftermarket orders. Backlog includes our unsatisfied (or partially unsatisfied) performance obligations related to contracts having an original expected duration in excess of one year of approximately$435 million , as discussed in Note 3 to our condensed consolidated financial statements included in this Quarterly Report.
Gross Profit and Gross Profit Margin
Three Months Ended September 30,
(Amounts in millions, except percentages) 2020 2019
Gross profit $ 285.2 $ 332.9
Gross profit margin 30.9 % 33.4 %
Nine Months Ended September 30,
(Amounts in millions, except percentages) 2020 2019
Gross profit $ 821.4 $ 939.8
Gross profit margin 29.9 % 32.7 %
Gross profit for the three months ended September 30, 2020 decreased by $47.7
million , or 14.3%, as compared with the same period in 2019. Gross profit margin
for the three months ended September 30, 2020 of 30.9% decreased from 33.4% for
the same period in 2019. The decrease in gross profit margin was primarily due
to sales mix shift to lower margin original equipment sales and revenue
recognized on lower margin original equipment orders as compared to the same
period in 2019, partially offset by increased savings related to our 2020
Realignment Program as compared to the same period in 2019. Aftermarket sales
represented approximately 48% of total sales, as compared with approximately 49%
of total sales for the same period in 2019.
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Gross profit for the nine months ended September 30, 2020 decreased by $118.4
million , or 12.6%, as compared with the same period in 2019. Gross profit margin
for the nine months ended September 30, 2020 of 29.9% decreased from 32.7% for
the same period in 2019. The decrease in gross profit margin was primarily due
to a sales mix shift to lower margin original equipment sales, revenue
recognized on lower margin original equipment orders as compared to the same
period in 2019, increased realignment charges associated with our 2020
Realignment Program and the unfavorable impact of underutilized capacity from
the COVID-19 pandemic resulting in $15.0 million of manufacturing costs being
expensed and other related costs. Aftermarket sales represented approximately
49% of total sales, as compared with approximately 51% of total sales for the
same period in 2019.
Selling, General and Administrative Expense
Three Months Ended September 30,
(Amounts in millions, except percentages) 2020 2019
SG&A $ 200.7 $ 230.4
SG&A as a percentage of sales 21.7 % 23.1 %
Nine Months Ended September 30,
(Amounts in millions, except percentages) 2020 2019
SG&A $ 675.5 $ 665.6
SG&A as a percentage of sales 24.6 % 23.2 %
SG&A for the three months ended September 30, 2020 decreased by $29.7 million ,
or 12.9%, as compared with the same period in 2019. Currency effects yielded an
increase of approximately $2 million . SG&A as a percentage of sales for the
three months ended September 30, 2020 decreased 140 basis points as compared
with the same period in 2019 primarily due to a decrease in travel and
selling-related expenses from our cost-saving initiatives in response to
COVID-19 and increased savings related to our 2020 Realignment Program as
compared to the same period in 2019, partially offset by the reversal of a loss
contingency related to a legal matter in the same period in 2019 that did not
recur.
SG&A for the nine months ended September 30, 2020 increased by $9.9 million , or
1.5%, as compared with the same period in 2019. Currency effects yielded a
decrease of approximately $4 million . SG&A as a percentage of sales for the nine
months ended September 30, 2020 increased 140 basis points as compared with the
same period in 2019 primarily due to increased charges related to our 2020
Realignment Program, an $8.5 million write-down of accounts receivables and
contract assets related to a contract with an oil and gas customer in Latin
America , and the favorable impacts resulting from gains from the sales of
non-strategic manufacturing facilities in the first quarter of 2019 that did not
recur. This increase was partially offset by a decrease in travel and
selling-related expenses from our cost-saving initiatives in response to
COVID-19 and increased savings related to our 2020 Realignment Program as
compared to the same period in 2019.
Net Earnings from Affiliates
Three Months Ended September 30 ,
(Amounts in millions) 2020 2019
Net earnings from affiliates $ 2.8$ 2.1 Nine Months Ended September 30, (Amounts in millions) 2020 2019 Net earnings from affiliates $ 9.1
Net earnings from affiliates for the three months endedSeptember 30, 2020 increased$0.7 million , or 33.3%, as compared with the same period in 2019. The increase was primarily a result of increased earnings of our FPD joint venture inSouth Korea . 39 -------------------------------------------------------------------------------- Table of Co ntents Net earnings from affiliates for the nine months endedSeptember 30, 2020 increase$1 million or 12.3% compared with the same period in 2019. The increase was primarily a result of increased earnings of our FPD joint venture inSouth Korea .
Operating Income and Operating Margin
Three Months Ended September 30,
(Amounts in millions, except percentages) 2020 2019
Operating income $ 87.3 $ 104.6
Operating income as a percentage of sales 9.4 % 10.5 %
Nine Months Ended September 30,
(Amounts in millions, except percentages) 2020 2019
Operating income $ 155.0 $ 282.2
Operating income as a percentage of sales 5.7 % 9.8 %
Operating income for the three months ended September 30, 2020 decreased by
$17.3 million , or 16.5%, as compared with the same period in 2019. The decrease
included negative currency effects of approximately $3 million . The decrease was
primarily a result of the $47.7 million decrease in gross profit and the $29.7
million decrease in SG&A.
Operating income for the nine months ended September 30, 2020 decreased by
$127.2 million , or 45.1%, as compared with the same period in 2019. The decrease
included negative currency effects of approximately $8 million . The decrease was
primarily a result of the $9.9 million increase in SG&A and $118.4 million
decrease in gross profit.
Interest Expense and Interest Income
Three Months Ended September 30,
(Amounts in millions) 2020 2019
Interest expense $ (14.7) $ (14.0)
Interest income 0.7 2.3
Nine Months Ended September 30,
(Amounts in millions) 2020 2019
Interest expense $ (40.6) $ (42.0)
Interest income 3.6 6.5
Interest expense for the three months ended September 30, 2020 increased $0.7
million , as compared with the same period in 2019. Interest income for the three
months ended September 30, 2020 decreased $1.6 million , as compared with the
same period in 2019. The increase in interest expense was primarily attributable
to the early extinguishment loss of $1.2 million resulting from our partial
tender of our 2022 Euro Senior Notes. The decrease in interest income was
partially due to lower interest rates on our average cash balances compared with
same period in 2019.
Interest expense for the nine months ended September 30, 2020 decreased $1.4
million , as compared with the same period in 2019. Interest income for the nine
months ended September 30, 2020 decreased $2.9 million , as compared with the
same period in 2019. The decrease in interest expense was primarily attributable
to lower borrowings compared with same period in 2019, partially offset by the
early extinguishment loss of $1.2 million resulting from our partial tender of
our 2022 Euro Senior Notes in the third quarter of 2020. The decrease in
interest income was partially due to lower interest rates on our average cash
balances compared with same period in 2019.
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Other Income (Expense), Net
Three Months Ended September 30,
(Amounts in millions) 2020 2019
Other income (expense), net $ (1.0) $ (8.5)
Nine Months Ended September 30,
(Amounts in millions) 2020 2019
Other income (expense), net $ 7.6 $ (15.2)
Other income (expense), net for the three months ended September 30, 2020
decreased $7.5 million as compared with the same period in 2019, due primarily
to an $6.0 million increase in gains from transactions in currencies other than
our sites' functional currencies, partially offset by a $0.5 million increase in
losses arising from transactions on foreign exchange contracts. The net change
was primarily due to the foreign currency exchange rate movements in the Euro,
Argentinian peso, Mexican peso and Brazilian real in relation to the U.S. dollar
during the three months ended September 30, 2020 , as compared with the same
period in 2019.
Other income (expense), net for the nine months ended September 30, 2020
decreased $22.8 million from an expense of $15.2 million as compared with the
same period in 2019, due primarily to a $20.9 million increase in gains from
transactions in currencies other than our sites' functional currencies and a
$2.2 million increase in gains arising from transactions on foreign exchange
contracts. The net change was primarily due to the foreign currency exchange
rate movements in the Euro, Mexican peso, Argentinian peso and Canadian dollar
in relation to the U.S. dollar during the three months ended September 30, 2020 ,
as compared with the same period in 2019.
Tax Expense and Tax Rate
Three Months Ended September 30,
(Amounts in millions, except percentages) 2020 2019
Provision for income taxes $ 18.7 $ 22.4
Effective tax rate 25.8 % 26.6 %
Nine Months Ended September 30,
(Amounts in millions, except percentages) 2020 2019
Provision for income taxes $ 59.2 $ 58.6
Effective tax rate 47.2 % 25.3 %
The effective tax rate of 25.8% for the three months ended September 30, 2020
decreased from 26.6% for the same period in 2019. The effective tax rate varied
from the U.S. federal statutory rate for the three months ended September 30,
2020 primarily due to the net impact of foreign operations. Refer to Note 14 to
our condensed consolidated financial statements included in this Quarterly
Report for further discussion.
The effective tax rate of 47.2% for the nine months ended September 30, 2020
increased from 25.3% for the same period in 2019. The effective tax rate varied
from the U.S. federal statutory rate for the nine months ended September 30,
2020 primarily due to the establishment of a valuation allowance against certain
deferred tax assets given the current and anticipated impact to the Company's
operations resulting from the COVID-19 pandemic and the distressed oil prices,
and the net impact of foreign operations. Refer to Note 14 to our condensed
consolidated financial statements included in this Quarterly Report for further
discussion.
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Other Comprehensive Income (Loss)
Three Months Ended September 30,
(Amounts in millions) 2020
2019
Other comprehensive income (loss) $ 24.3$ (26.9) Nine Months Ended September 30, (Amounts in millions) 2020 2019 Other comprehensive income (loss) $ (33.8)
Other comprehensive income (loss) for the three months endedSeptember 30, 2020 increased$51.2 million from a loss of$26.9 million in 2019. The increased income was primarily due to foreign currency translation adjustments resulting primarily from exchange rate movements of the Euro, British pound, Chinese yuan and Indian rupee versus theU.S. dollar during the three months endedSeptember 30, 2020 , as compared with the same period in 2019. Other comprehensive income (loss) for the nine months endedSeptember 30, 2020 increased$14.5 million as compared to the same period in 2019. The increased loss was primarily due to foreign currency translation adjustments resulting primarily from exchange rate movements of the Euro, Mexican peso, Indian rupee and the British pound versus theU.S. dollar during the nine months endedSeptember 30, 2020 , as compared with the same period in 2019. Business Segments We conduct our operations through two business segments based on the type of product and how we manage the business. We evaluate segment performance and allocate resources based on each segment's operating income. The key operating results for our two business segments, FPD and FCD, are discussed below. Flowserve Pump Division Segment Results Our largest business segment is FPD, through which we design, manufacture, distribute and service highly custom engineered pumps, pre-configured industrial pumps, pump systems, mechanical seals, and auxiliary systems (collectively referred to as "original equipment") and related services. FPD primarily operates in the oil and gas, power generation, chemical and general industries. FPD operates in 48 countries with 39 manufacturing facilities worldwide, 13 of which are located inEurope , 12 inNorth America , eight inAsia and six inLatin America , and it operates 139 QRCs, including those co-located in manufacturing facilities and/or shared with FCD. Three Months Ended September 30, (Amounts in millions, except percentages) 2020 2019 Bookings$ 574.1 $ 742.1 Sales 670.2$ 682.7 Gross profit 210.0$ 230.4 Gross profit margin 31.3 % 33.7 % SG&A 126.2 147.1 Segment operating income 86.7 85.5 Segment operating income as a percentage of sales 12.9 % 12.5 % 42
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Table of Co ntents
Nine Months Ended September 30,
(Amounts in millions, except percentages) 2020 2019
Bookings $ 1,792.3 $ 2,253.5
Sales 1,979.9 1,966.8
Gross profit 603.7 653.8
Gross profit margin 30.5 % 33.2 %
SG&A 426.1 419.7
Segment operating income 186.7 242.1
Segment operating income as a percentage of sales 9.4 % 12.3 %
Bookings for the three months ended September 30, 2020 decreased by $168.0
million , or 22.6%, as compared with the same period in 2019. The decrease
included currency benefits of approximately $1 million . The decrease in customer
bookings was driven by decreased orders in the oil and gas, chemical and power
generation industries, partially offset by increased bookings in the general
industries. Customer bookings decreased $61.3 million into North America , $59.3
million into the Middle East , $32.2 million into Asia Pacific , $11.6 million
into Europe , $10.8 million into Africa and $4.4 million into Latin America .
Customer bookings were down in both aftermarket and original equipment, which
have decreased in light of the impacts of COVID-19 on customer spending and
distressed oil prices on these industries. Interdivision bookings (which are
eliminated and are not included in consolidated bookings as disclosed above)
increased by $4.1 million .
Bookings for the nine months ended September 30, 2020 decreased by $461.2
million , or 20.5%, as compared with the same period in 2019. The decrease
included negative currency effects of approximately $28 million . The decrease in
customer bookings was driven by decreased orders in the oil and gas, chemical
and power generation industries, partially offset by increased bookings in the
general industries. Customer bookings decreased $228.5 million into North
America , $121.8 million into the Middle East , $45.9 million into Asia Pacific ,
$24.9 million into Africa , $23.3 million into Europe and $10.5 million into
Latin America . The decrease in customer bookings was primarily driven by
customer original equipment bookings which have decreased in light of the
impacts of COVID-19 on customer spending and distressed oil prices on these
industries. Interdivision bookings (which are eliminated and are not included in
consolidated bookings as disclosed above) increased $5.7 million .
Sales for the three months ended September 30, 2020 decreased by $12.5 million ,
or 1.8% as compared with the same period in 2019 and included currency benefits
of approximately $2 million . The decrease was driven by customer aftermarket
sales. Decreased customer sales of $33.8 million into North America , $3.9
million into Latin America , $2.5 million into Africa and $2.0 million into the
Middle East , partially offset by increased sales of $22.6 million into Asia
Pacific and $7.9 million into Europe .
Sales for the nine months ended September 30, 2020 increased $13.1 million , or
0.7%, as compared with the same period in 2019. The increase in sales included
negative currency effects of approximately $30 million . The increase in sales
was driven by original equipment sales. Customer sales increased $39.2 million
into the Middle East , $25.8 million into Asia Pacific and $2.1 million into
Latin America , partially offset by decreased sales of $25.4 million into Europe ,
$10.8 million into Africa and $12.4 million into North America .
Gross profit for the three months ended September 30, 2020 decreased by $20.4
million , or 8.9%, as compared with the same period in 2019. Gross profit margin
for the three months ended September 30, 2020 of 31.3% decreased from 33.7% for
the same period in 2019. The decrease in gross profit margin was primarily due
to a sales mix shift to lower margin original equipment sales as compared to the
same period in 2019 and the increased charges related to our 2020 Realignment
Program, partially offset by increased savings related to our 2020 Realignment
Program as compared to the same period in 2019.
Gross profit for the nine months ended September 30, 2020 decreased by $50.1
million , or 7.7%, as compared with the same period in 2019. Gross profit margin
for the nine months ended September 30, 2020 of 30.5% decreased from 33.2% for
the same period in 2019. The decrease in gross profit margin was primarily due
to a sales mix shift to lower margin original equipment sales as compared to the
same period in 2019, the increased charges related to our 2020 Realignment
Program and the unfavorable impact of underutilized capacity from the COVID-19
pandemic resulting in $9.2 million of manufacturing costs being expensed and
other related costs.
SG&A for the three months ended September 30, 2020 decreased by $20.9 million ,
or 14.2%, as compared with the same period in 2019. Currency effects provided an
increase of approximately $2 million . The decrease in SG&A was primarily due to
a decrease in travel and selling-related expenses and increased savings related
to our 2020 Realignment Program as compared to the same period in 2019.
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Table of Co ntents
SG&A for the nine months ended September 30, 2020 increased by $6.4 million , or
1.5%, as compared with the same period in 2019. Currency effects provided a
decrease of approximately $4 million . The increase in SG&A was primarily due to
an $8.5 million write-down of accounts receivables and contract assets related
to a contract with an oil and gas customer in Latin America , the favorable
impacts resulting from gains from the sales of non-strategic manufacturing
facilities in the first quarter of 2019 that did not recur and increased charges
related to our 2020 Realignment Program, partially offset by a decrease in
travel and selling-related expenses compared to the same period in 2019.
Operating income for the three months ended September 30, 2020 increased by $1.2
million , or 1.4%, as compared with the same period in 2019. The increase
included negative currency effects of approximately $3 million . The increase was
primarily due to the $20.9 million decrease in SG&A and the $20.4 million
decrease in gross profit.
Operating income for the nine months ended September 30, 2020 decreased by $55.4
million , or 22.9%, as compared with the same period in 2019. The decrease
included negative currency effects of approximately $8 million . The decrease was
primarily due to the $50.1 million decrease in gross profit and the $6.4 million
increase in SG&A.
Backlog of $1,338.9 million at September 30, 2020 decreased by $222.0 million ,
or 14.2%, as compared with December 31, 2019 . Currency effects provided a
decrease of approximately $7 million .
Flow Control Division Segment Results
FCD designs, manufactures and distributes a broad portfolio of
engineered-to-order and configured-to-order isolation valves, control valves,
valve automation products, boiler controls and related services. FCD leverages
its experience and application know-how by offering a complete menu of
engineered services to complement its expansive product portfolio. FCD has a
total of 48 manufacturing facilities and QRCs in 22 countries around the world,
with five of its 21 manufacturing operations located in the U.S. , 10 located in
Europe , five located in Asia Pacific and one located in Latin America . Based on
independent industry sources, we believe that FCD is the second largest
industrial valve supplier on a global basis.
Three Months Ended September 30,
(Amounts in millions, except percentages) 2020 2019
Bookings $ 237.6 $ 282.7
Sales 255.2 314.0
Gross profit 78.1 101.8
Gross profit margin 30.6 % 32.4 %
SG&A 47.3 52.5
Segment operating income 30.8 49.2
Segment operating income as a percentage of sales 12.1 % 15.7 %
Nine Months Ended September 30,
(Amounts in millions, except percentages) 2020 2019
Bookings $ 807.8 $ 942.8
Sales 766.9 908.7
Gross profit 229.1 293.7
Gross profit margin 29.9 % 32.3 %
SG&A 154.9 159.1
Segment operating income 74.2 134.7
Segment operating income as a percentage of sales 9.7 % 14.8 %
Bookings for the three months ended September 30, 2020 decreased by $45.1
million , or 16.0%, as compared with the same period in 2019. Bookings included
currency benefits of approximately $2 million . The decrease in customer bookings
was primarily driven by decreased orders in the oil and gas, power generation
and general industries. Decrease customers bookings of $29.4 million into North
America , $8.8 million into Europe , $8.1 million into Asia Pacific , $3.3 million
into the Middle East and $2.4 million into Africa were partially offset by
increased bookings of $2.7 million into Latin America . The decrease was more
heavily weighted towards customer original equipment bookings.
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Table of Co ntents
Bookings for the nine months ended September 30, 2020 decreased by $135.0
million , or 14.3%, as compared with the same period in 2019. Bookings included
negative currency effects of approximately $8 million . Decreased customer
bookings in the oil and gas, chemical and general industries were partially
offset by increased bookings in the power generation industry. Decreased
customer bookings of $102.1 million into North America , $30.6 million into
Europe , $6.9 million into Africa , $4.4 million into the Middle East and $2.7
million into Asia Pacific were partially offset by increased bookings of $5.8
million into Latin America . The decrease was primarily driven by lower customer
original equipment bookings.
Sales for the three months ended September 30, 2020 decreased $58.8 million , or
18.7%, as compared with the same period in 2019. The decrease included currency
benefits of approximately $3 million . Decreased sales were primarily driven by
original equipment sales. The decrease was primarily driven by decreased
customer sales of $36.9 million into North America , $20.1 million into Asia
Pacific , $5.4 million into Europe and $1.6 million into Latin America , partially
offset by increased sales of $3.0 million into the Middle East and $2.3 million
into Africa .
Sales for the nine months ended September 30, 2020 decreased $141.8 million , or
15.6%, as compared with the same period in 2019. The decrease included negative
currency effects of approximately $5 million . Decreased sales were primarily
driven by original equipment sales. The decrease was primarily driven by
decreased customer sales of $76.3 million into North America , $30.9 million into
Europe , $38.3 million into Asia Pacific and $5.1 million into Latin America ,
partially offset by increased sales of $4.2 million into the Middle East and
$3.6 million into Africa .
Gross profit for the three months ended September 30, 2020 decreased by $23.7
million , or 23.3%, as compared with the same period in 2019. Gross profit margin
for the three months ended September 30, 2020 of 30.6% decreased from 32.4% for
the same period in 2019. The decrease in gross profit margin was primarily due
to lower sales volume and revenue recognized on lower margin original equipment
orders as compared to the same period in 2019, partially offset by increased
savings related to our 2020 Realignment Program as compared to the same period
in 2019.
Gross profit margin for the nine months ended September 30, 2020 decreased of
$64.6 million , or 22.0%, as compared with the same period in 2019. Gross profit
margin for the nine months ended September 30, 2020 of 29.9% decreased from
32.3% for the same period in 2019. The decrease in gross profit margin was
primarily due to increased charges related to our 2020 Realignment Program,
lower sales volume and revenue recognized on lower margin original equipment
orders as compared to the same period in 2019 and the unfavorable impact of
underutilized capacity from the COVID-19 pandemic resulting in $5.8 million of
manufacturing costs being expensed and other related costs.
SG&A for the three months ended September 30, 2020 decreased by $5.2 million , or
10.0%, as compared with the same period in 2019. Currency effects provided an
increase of approximately $1 million . The decrease in SG&A was primarily due to
a decrease in travel and selling-related expenses from our cost saving
initiatives in response to COVID-19 and increased savings related to our 2020
Realignment Program as compared to the same period in 2019.
SG&A for the nine months ended September 30, 2020 decreased by $4.2 million , or
2.6%, as compared with the same period in 2019. Currency effects provided a
decrease of approximately $1 million . The decrease in SG&A was primarily due to
a decrease in travel from our cost saving initiatives in response to COVID-19,
partially offset by increased charges related to our 2020 Realignment Program as
compared to the same period in 2019.
Operating income for the three months ended September 30, 2020 decreased by
$18.4 million , or 37.5%, as compared with the same period in 2019. The decrease
included currency benefits of less than $1 million . The decrease was primarily
due to the $23.7 million decrease in gross profit, partially offset by the $5.2
million decrease in SG&A.
Operating income for the nine months ended September 30, 2020 decreased by $60.5
million , or 44.9%, as compared with the same period in 2019. The decrease
included negative currency effects of less than $1 million . The decrease was
primarily due to the $64.6 million decrease in gross profit, partially offset by
the $4.2 million decrease in SG&A.
Backlog of $647.9 million at September 30, 2020 increased by $47.8 million , or
8.0%, as compared with December 31, 2019 . Currency effects provided an increase
of approximately $8 million .
45
-------------------------------------------------------------------------------- Table of Co ntents LIQUIDITY AND CAPITAL RESOURCES
Cash Flow and Liquidity Analysis
Nine Months Ended September 30,
(Amounts in millions) 2020 2019
Net cash flows provided (used) by operating activities $ 115.6
(34.2) (4.5)
Net cash flows provided (used) by financing activities 179.0 (195.5)
Existing cash, cash generated by operations and borrowings available under our
Senior Credit Facility are our primary sources of short-term liquidity. We
monitor the depository institutions that hold our cash and cash equivalents on a
regular basis, and we believe that we have placed our deposits with creditworthy
financial institutions. Our sources of operating cash generally include the sale
of our products and services and the conversion of our working capital,
particularly accounts receivable and inventories. Our cash balance at
September 30, 2020 was $921.2 million , as compared with $671.0 million at
December 31, 2019 .
Our cash balance increased by $250.2 million to $921.2 million at September 30,
2020 , as compared with December 31, 2019 . The cash activity during the first
nine months of 2020 included $498.3 million in proceeds from the issuance of our
2030 Senior Notes and $10.8 million of proceeds from the sale of non-strategic
manufacturing facilities in 2019 that were included in our 2015 Realignment
Programs, partially offset by a $191.3 million partial tender offer of our 2022
Euro Senior Notes, $78.1 million in dividend payments, $47.9 million in capital
expenditures and $32.1 million of share repurchases.
For the nine months ended September 30, 2020 , our cash provided by operating
activities was $115.6 million , as compared to $143.2 million for the same period
in 2019. Cash flow used from working capital increased for the nine months ended
September 30, 2020 , due primarily to increased cash flow used related to
accounts payable and contract liabilities, partially offset by increased cash
flows from accounts receivable and inventory as compared to the same period in
2019.
Decreases in accounts receivable provided $24.3 million of cash flow for the
nine months ended September 30, 2020 , as compared to a cash flow use of $12.0
million for the same period in 2019. As of September 30, 2020 , our days' sales
outstanding ("DSO") was 73 days as compared with 71 days as of September 30,
2019 .
Increases in contract assets used $37.3 million of cash flow for the nine months
ended September 30, 2020 , as compared with $35.6 million for the same period in
2019.
Increases in inventory used $52.0 million and $64.3 million of cash flow for the
nine months ended September 30, 2020 and September 30, 2019 , respectively.
Inventory turns were 3.6 times at September 30, 2020 , as compared to 3.9 as of
September 30, 2019 .
Decreases in accounts payable used $21.8 million of cash flow for the nine
months ended September 30, 2020 , as compared with $12.0 million for the same
period in 2019. Increases in accrued liabilities and income taxes payable
provided $24.3 million of cash flow for the nine months ended September 30,
2020 , as compared with cash flows used of $8.5 million for the same period in
2019.
Decreases in contract liabilities used $22.5 million of cash flow for the nine
months ended September 30, 2020 , as compared with cash flows provided $26.6
million for the same period in 2019.
Cash flows used by investing activities during the nine months ended
September 30, 2020 were $34.2 million , as compared to $4.5 million for the same
period in 2019. Capital expenditures during the nine months ended September 30,
2020 were $47.9 million , an increase of $2.6 million as compared with the same
period in 2019. Our capital expenditures are generally focused on strategic
initiatives to pursue information technology infrastructure, ongoing scheduled
replacements and upgrades and cost reduction opportunities. In 2020, total
capital expenditures are expected to be approximately $60 million . In addition,
proceeds received during the nine months ended September 30, 2020 from disposal
of assets provided $13.8 million , primarily from the 2019 sale of non-strategic
manufacturing facilities that were included in our Realignment Programs.
Proceeds received during the first nine months of 2019 included $40.8 million of
proceeds from the sale of non-strategic manufacturing facilities that were
included in our 2015 Realignment Programs.
Cash flows provided by financing activities during the nine months ended
September 30, 2020 were $179.0 million , as compared with cash flows used of
$195.5 million for the same period in 2019. Cash inflows during the nine months
ended September 30, 2020 resulted primarily from $498.3 million in net proceeds
from the issuance of the 2030 Senior Notes, partially offset by a $191.3 million
payment on long-term debt resulting from our partial tender offer of our 2022
Euro Senior
46
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Table of Co ntents
Notes, $78.1 million of dividend payments and the repurchase of $32.1 million of
common shares. We intend to use the remaining net proceeds from the public
offering of the 2030 Senior Notes for future debt reduction.
As of September 30, 2020 , we had an available capacity of $745.9 million on our
Senior Credit Facility, which provides for a $800.0 million unsecured revolving
credit facility with a maturity date of July 16, 2024 . Our borrowing capacity is
subject to financial covenant limitations based on the terms of our Senior
Credit Facility and is also reduced by outstanding letters of credit. Our Senior
Credit Facility is committed and held by a diversified group of financial
institutions. Refer to Note 7 to our condensed consolidated financial statements
included in this Quarterly Report for additional information concerning our
Senior Credit Facility.
During the nine months ended September 30, 2020 we made no cash contributions to
our U.S. pension plan. At December 31, 2019 , our U.S. pension plan was fully
funded as defined by applicable law. After consideration of our funded status,
we elected to make no contributions attributable to the U.S. pension plan in
2020. We continue to maintain an asset allocation consistent with our strategy
to maximize total return, while reducing portfolio risks through asset class
diversification.
Considering our current debt structure and cash needs, we currently believe cash
flows generated from operating activities combined with availability under our
Senior Credit Facility and our existing cash balance will be sufficient to meet
our cash needs for the next 12 months. Cash flows from operations could be
adversely affected by economic, political and other risks associated with sales
of our products, operational factors, competition, fluctuations in foreign
exchange rates and fluctuations in interest rates, among other factors. See
"COVID-19 Liquidity Update" and "Cautionary Note Regarding Forward-Looking
Statements" below.
As of September 30, 2020 , we have $113.6 million of remaining capacity for Board
of Directors approved share repurchases. While we currently intend to continue
to return cash through dividends and/or share repurchases for the foreseeable
future, any future returns of cash through dividends and/or share repurchases
will be reviewed individually, declared by our Board of Directors at its
discretion and implemented by management.
Financing
Credit Facilities See Note 12 to our consolidated financial statements included in our 2019 Annual Report and Note 7 to our condensed consolidated financial statements included in this Quarterly Report for a discussion of our Senior Credit Facility and related covenants. We were in compliance with all applicable covenants under our Senior Credit Facility as ofSeptember 30, 2020 . COVID-19 Liquidity Update Given our current financial condition, we expect to be able to maintain adequate liquidity over the next 12 months as we manage through the current market environment. As ofSeptember 30, 2020 , we had approximately$1.7 billion of liquidity, consisting of cash and cash equivalents of$921.2 million and$745.9 million of borrowings available under our Senior Credit Facility. In light of the liquidity currently available to us, and the costs savings measures planned and already in place, we expect to be able to maintain adequate liquidity over the next 12 months as we manage through the current market environment. We will continue to actively monitor the potential impacts of COVID-19 and related events on the credit markets in order to maintain sufficient liquidity and access to capital throughout 2020. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Management's discussion and analysis of financial condition and results of operations are based on our condensed consolidated financial statements and related footnotes contained within this Quarterly Report. Our critical accounting policies used in the preparation of our condensed consolidated financial statements were discussed in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our 2019 Annual Report. During the three months endedSeptember 30, 2020 , our critical accounting policies and methodology used in determining reserves for contingent losses associated with unasserted asbestos claims changed. As described below, we identified accounting errors related to the recognition of a liability for unasserted asbestos claims. The adjustments primarily related to an incurred but not reported ("IBNR") liability associated with unasserted asbestos claims, but also included adjustments related to the associated receivables for expected insurance proceeds for asbestos settlement and defense costs from insurance coverage and related legal fees. For further discussion related to this matter refer to Notes 1 and 2 to our condensed consolidated financial statements included in this Quarterly Report. 47 -------------------------------------------------------------------------------- Table of Co ntents The Company is a defendant in a number of lawsuits that seek to recover damages for personal injury allegedly resulting from exposure to asbestos-containing products formerly manufactured and/or distributed by heritage companies of the Company. Historically, the Company estimated the liability for unsettled asbestos-related claims based on known claims and on experience during the preceding two years for claims filed, settled and dismissed, with adjustments for events deemed unusual or unlikely to recur. InOctober 2020 , the Company entered into a settlement agreement with two insurance companies providing coverage for one of its heritage companies. Given the size of the settlement, and as part of the third quarter close process, the Company re-evaluated its accounting for asbestos-related matters and evaluated the amount of receivables that were currently recorded. Additionally the Company considered the amount of historical data available, related to historic asbestos claims and settlements, which led the Company to conclude that a liability for an IBNR was probable and reasonably estimable. The Company initiated an actuarial study to determine the amount of the IBNR, excluding legal fees, and evaluated all insurance programs for all product lines for insurance recoveries. With the assistance of third party consultants, the Company estimates the liability for pending and future claims not yet asserted, and which are probable and estimable, through 2049, which represents the expected end of our asbestos liability exposure with no further ongoing claims expected beyond that date. This estimate is based on the Company's historical claim experience and estimates of the number and resolution cost of potential future claims that may be filed based on anticipated levels of unique plaintiff asbestos-related claims in theU.S. tort system against all defendants, the diminished volatility and consistency of observable claims data, the period of time that has elapsed since we stopped manufacturing products that contained encapsulated asbestos and an expected downward trend in claims due to the average age of our claimants. This estimate is not discounted to present value. In light of the uncertainties and variables inherent in the long-term projection of the Company's total asbestos liability, as part of our ongoing review of asbestos claims, each year we will reassess the projected liability of unasserted asbestos claims to be filed through 2049, and we will continually reassess the time horizon over which a reasonable estimate of unasserted claims can be projected. The Company assesses the sufficiency of its estimated liability for pending and future claims on an ongoing basis by evaluating actual experience regarding claims filed, settled and dismissed, and amounts paid in settlements. In addition to claims and settlement experience, the Company considers additional quantitative and qualitative factors such as changes in legislation, the legal environment and the Company's defense strategy. In connection with the Company's ongoing review of its asbestos-related claims, the Company also reviewed the amount of its potential insurance coverage for such claims, taking into account the remaining limits of such coverage, the number and amount of claims on our insurance from co-insured parties, ongoing litigation against the Company's insurers, potential remaining recoveries from insolvent insurers, the impact of previous insurance settlements and coverage available from solvent insurers not party to the coverage litigation. The Company continues to have ongoing insurance coverage available for a significant amount of the potential future asbestos-related claims and may have additional insurance coverage, in the future. The study from the Company's actuary, based on data as ofSeptember 30, 2020 , provided for a range of possible future liability from approximately$80.1 million to$131.7 million . The Company does not believe any amount within the range of potential outcomes represents a better estimate than another given the many factors and assumptions inherent in the projections and therefore the Company has recorded the liability at the actuarial central estimate of approximately$101.1 million . The Company has recorded estimated insurance receivables of approximately$87.5 million . The amounts recorded for the asbestos-related liability and the related insurance receivables are based on facts known at the time and a number of assumptions. However, projecting future events, such as the number of new claims to be filed each year, the length of time it takes to defend, resolve, or otherwise dispose of such claims, coverage issues among insurers and the continuing solvency of various insurance companies, as well as the numerous uncertainties surrounding asbestos litigation inthe United States , could cause the actual liability and insurance recoveries for us to be higher or lower than those projected or recorded. Changes recorded in the estimated liability and estimated insurance recovery based on projections of asbestos litigation and corresponding insurance coverage, result in the recognition of additional expense or income. Liabilities are recorded for various non-asbestos contingencies arising in the normal course of business when it is both probable that a loss has been incurred and such loss is reasonably estimable. Assessments of reserves are based on information obtained from our independent and in-house experts, including recent legal decisions and loss experience in similar situations. The recorded legal reserves are susceptible to changes due to new developments regarding the facts and circumstances of each matter, changes in political environments, legal venue and other factors. Recorded environmental reserves could change based on further analysis of our properties, technological innovation and regulatory environment changes. Other critical policies, for which no significant changes have occurred in the nine months endedSeptember 30, 2020 , include:
•Revenue Recognition;
48
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Table of Co ntents
•Deferred Taxes, Tax Valuation Allowances and Tax Reserves;
•Retirement and Postretirement Benefits; and
•Valuation of
The process of preparing condensed consolidated financial statements in conformity withU.S. GAAP requires the use of estimates and assumptions to determine certain of the assets, liabilities, revenues and expenses. These estimates and assumptions are based upon what we believe is the best information available at the time of the estimates or assumptions. The estimates and assumptions could change materially as conditions within and beyond our control change. Accordingly, actual results could differ materially from those estimates. The significant estimates are reviewed quarterly with the Audit Committee of our Board of Directors. Based on an assessment of our accounting policies and the underlying judgments and uncertainties affecting the application of those policies, we believe that our condensed consolidated financial statements provide a meaningful and fair perspective of our consolidated financial condition and results of operations. This is not to suggest that other general risk factors, such as changes in worldwide demand, changes in material costs, performance of acquired businesses and others, could not adversely impact our consolidated financial condition, results of operations and cash flows in future periods. See "Cautionary Note Regarding Forward-Looking Statements" below. ACCOUNTING DEVELOPMENTS We have presented the information about pronouncements not yet implemented in Note 1 to our condensed consolidated financial statements included in this Quarterly Report. Cautionary Note Regarding Forward-Looking Statements This Quarterly Report includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, as amended. Words or phrases such as, "may," "should," "expects," "could," "intends," "plans," "anticipates," "estimates," "believes," "predicts" or other similar expressions are intended to identify forward-looking statements, which include, without limitation, statements concerning our future financial performance, future debt and financing levels, investment objectives, implications of litigation and regulatory investigations and other management plans for future operations and performance. The forward-looking statements included in this Quarterly Report are based on our current expectations, projections, estimates and assumptions. These statements are only predictions, not guarantees. Such forward-looking statements are subject to numerous risks and uncertainties that are difficult to predict. These risks and uncertainties may cause actual results to differ materially from what is forecast in such forward-looking statements and are currently, or in the future could be, amplified by the COVID-19 pandemic. Specific factors that might cause such a difference include, without limitation, the following:
•uncertainties related to the impact of the COVID-19 pandemic on our business and operations, financial results and financial position, our customers and suppliers, and on the global economy, including its impact on our sales;
•a portion of our bookings may not lead to completed sales, and our ability to convert bookings into revenues at acceptable profit margins;
•changes in the global financial markets and the availability of capital and the potential for unexpected cancellations or delays of customer orders in our reported backlog;
•our dependence on our customers' ability to make required capital investment and maintenance expenditures. The liquidity and financial position of our customers could impact capital investment decisions and their ability to pay in full and/or on a timely basis; •if we are not able to successfully execute and realize the expected financial benefits from our strategic transformation, realignment and other cost-saving initiatives, our business could be adversely affected;
•risks associated with cost overruns on fixed fee projects and in accepting customer orders for large complex custom engineered products;
•the substantial dependence of our sales on the success of the oil and gas, chemical, power generation and water management industries;
•the adverse impact of volatile raw materials prices on our products and operating margins;
•economic, political and other risks associated with our international operations, including military actions, trade embargoes or changes to tariffs or trade agreements that could affect customer markets, particularly North African, Russian and Middle Eastern markets and global oil and gas producers, and non-compliance withU.S. export/reexport control, foreign corrupt practice laws, economic sanctions and import laws and regulations;
•increased aging and slower collection of receivables, particularly in
•our exposure to fluctuations in foreign currency exchange rates, particularly the Euro and British pound and in hyperinflationary countries such asVenezuela andArgentina ;
•our furnishing of products and services to nuclear power plant facilities and other critical applications;
•potential adverse consequences resulting from litigation to which we are a party, such as litigation involving asbestos-containing material claims;
•expectations regarding acquisitions and the integration of acquired businesses;
•our relative geographical profitability and its impact on our utilization of deferred tax assets, including foreign tax credits;
•the potential adverse impact of an impairment in the carrying value of goodwill or other intangible assets;
•our dependence upon third-party suppliers whose failure to perform timely could adversely affect our business operations;
•the highly competitive nature of the markets in which we operate;
•environmental compliance costs and liabilities;
•potential work stoppages and other labor matters;
•access to public and private sources of debt financing;
•our inability to protect our intellectual property in the
•obligations under our defined benefit pension plans;
•our internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud;
•the recording of increased deferred tax asset valuation allowances in the future or the impact of tax law changes on such deferred tax assets could affect our operating results;
•risks and potential liabilities associated with cyber security threats; and
•ineffective internal controls could impact the accuracy and timely reporting of our business and financial results.
These and other risks and uncertainties are more fully discussed in the risk factors identified in "Item 1A. Risk Factors" in Part I of our 2019 Annual Report, Part II of the Quarterly Report for the period endedMarch 31, 2020 , and Part II of this Quarterly Report, and may be identified in our Quarterly Reports on Form 10-Q and our other filings with theSEC and/or press releases from time to time. All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to update any forward-looking statement.
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