Edgar Filing: FLOWSERVE CORP

FLS 6.30.2013 Financial Statements

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)


þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2013


¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM to .

Commission File No. 1-13179

FLOWSERVE CORPORATION

(Exact name of registrant as specified in its charter)



New York		31-0267900
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

5215 N. O’Connor Blvd., Suite 2300, Irving, Texas		75039
(Address of principal executive offices)		(Zip Code)



	(972) 443-6500
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). þ Yes ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer þ	Accelerated filer ¨	Non-accelerated filer ¨ (do not check if a smaller reporting company)
Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes þ No

As of July 19, 2013, there were 140,611,927 shares of the issuer’s common stock outstanding.

FLOWSERVE CORPORATION

FORM 10-Q

TABLE OF CONTENTS



	Page
	No.
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
Condensed Consolidated Statements of Income and Condensed Consolidated Statements of Comprehensive Income – Three Months Ended June 30, 2013 and 2012 (unaudited)	1
Condensed Consolidated Statements of Income and Condensed Consolidated Statements of Comprehensive Income – Six Months Ended June 30, 2013 and 2012 (unaudited)	2
Condensed Consolidated Balance Sheets – June 30, 2013 and December 31, 2012 (unaudited)	3
Condensed Consolidated Statements of Cash Flows – Six Months Ended June 30, 2013 and 2012 (unaudited)	4
Notes to Condensed Consolidated Financial Statements	5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.	22
Item 3. Quantitative and Qualitative Disclosures About Market Risk.	34
Item 4. Controls and Procedures.	34

PART II – OTHER INFORMATION
Item 1. Legal Proceedings.	34
Item 1A. Risk Factors.	35
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.	35
Item 6. Exhibits.	35
SIGNATURES	36
EX-3.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

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PART I — FINANCIAL INFORMATION


Item 1.	Financial Statements.

FLOWSERVE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)



(Amounts in thousands, except per share data)	Three Months Ended June 30,
	2013			2012
Sales	$	1,239,526		$	1,182,225
Cost of sales	(817,950		)	(797,623		)
Gross profit	421,576			384,602
Selling, general and administrative expense	(240,200		)	(223,892		)
Net earnings from affiliates	2,145			4,086
Operating income	183,521			164,796
Interest expense	(13,125		)	(8,922		)
Interest income	277			237
Other income (expense), net	616			(8,046		)
Earnings before income taxes	171,289			148,065
Provision for income taxes	(50,395		)	(39,580		)
Net earnings, including noncontrolling interests	120,894			108,485
Less: Net earnings attributable to noncontrolling interests	(508		)	(1,169		)
Net earnings attributable to Flowserve Corporation	$	120,386		$	107,316
Net earnings per share attributable to Flowserve Corporation common shareholders:
Basic	$	0.85		$	0.66
Diluted	0.84			0.66
Cash dividends declared per share	$	0.14		$	0.12

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)



(Amounts in thousands)	Three Months Ended June 30,
	2013			2012
Net earnings, including noncontrolling interests	$	120,894		$	108,485
Other comprehensive loss:
Foreign currency translation adjustments, net of taxes of $17,811 and $35,520, respectively	(29,425		)	(58,699		)
Pension and other postretirement effects, net of taxes of $(1,456) and $(1,278), respectively	2,895			2,501
Cash flow hedging activity, net of taxes of $(151) and $(78), respectively	234			88
Other comprehensive loss	(26,296		)	(56,110		)
Comprehensive income, including noncontrolling interests	94,598			52,375
Comprehensive income attributable to noncontrolling interests	(349		)	(1,022		)
Comprehensive income attributable to Flowserve Corporation	$	94,249		$	51,353

See accompanying notes to condensed consolidated financial statements.

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FLOWSERVE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)



(Amounts in thousands, except per share data)	Six Months Ended June 30,
	2013			2012
Sales	$	2,336,122		$	2,257,205
Cost of sales	(1,541,238		)	(1,513,420		)
Gross profit	794,884			743,785
Selling, general and administrative expense	(474,708		)	(445,781		)
Net earnings from affiliates (Note 2)	33,824			9,315
Operating income	354,000			307,319
Interest expense	(25,216		)	(17,731		)
Interest income	551			519
Other expense, net	(10,412		)	(12,985		)
Earnings before income taxes	318,923			277,122
Provision for income taxes	(99,128		)	(75,095		)
Net earnings, including noncontrolling interests	219,795			202,027
Less: Net earnings attributable to noncontrolling interests	(1,619		)	(1,586		)
Net earnings attributable to Flowserve Corporation	$	218,176		$	200,441
Net earnings per share attributable to Flowserve Corporation common shareholders:
Basic	$	1.52		$	1.23
Diluted	1.51			1.22
Cash dividends declared per share	$	0.28		$	0.24

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)



(Amounts in thousands)	Six Months Ended June 30,
	2013			2012
Net earnings, including noncontrolling interests	$	219,795		$	202,027
Other comprehensive loss:
Foreign currency translation adjustments, net of taxes of $40,607 and $14,256, respectively	(67,086		)	(23,559		)
Pension and other postretirement effects, net of taxes of $(3,053) and $(1,662), respectively	9,627			2,546
Cash flow hedging activity, net of taxes of $(325) and $159, respectively	475			(304		)
Other comprehensive loss	(56,984		)	(21,317		)
Comprehensive income, including noncontrolling interests	162,811			180,710
Comprehensive income attributable to noncontrolling interests	(1,693		)	(1,474		)
Comprehensive income attributable to Flowserve Corporation	$	161,118		$	179,236

See accompanying notes to condensed consolidated financial statements.

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FLOWSERVE CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)



(Amounts in thousands, except par value)	June 30,			December 31,
	2013			2012
ASSETS
Current assets:
Cash and cash equivalents	$	104,712		$	304,252
Accounts receivable, net of allowance for doubtful accounts of $24,796 and $21,491, respectively	1,080,240			1,103,724
Inventories, net	1,184,242			1,086,663
Deferred taxes	148,273			151,093
Prepaid expenses and other	94,399			94,484
Total current assets	2,611,866			2,740,216
Property, plant and equipment, net of accumulated depreciation of $806,862 and $784,864, respectively	660,119			654,179
Goodwill	1,045,958			1,053,852
Deferred taxes	25,385			26,706
Other intangible assets, net	144,165			150,075
Other assets, net	150,650			185,930
Total assets	$	4,638,143		$	4,810,958

LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	526,116		$	616,900
Accrued liabilities	805,929			906,593
Debt due within one year	277,873			59,478
Deferred taxes	10,172			7,654
Total current liabilities	1,620,090			1,590,625
Long-term debt due after one year	849,211			869,116
Retirement obligations and other liabilities	446,893			456,742
Shareholders’ equity:
Common shares, $1.25 par value	220,991			220,991
Shares authorized – 305,000
Shares issued – 176,793 and 176,793, respectively
Capital in excess of par value	455,984			467,856
Retained earnings	2,757,262			2,579,308
Treasury shares, at cost – 37,300 and 32,389 shares, respectively	(1,447,399		)	(1,164,496		)
Deferred compensation obligation	10,663			10,870
Accumulated other comprehensive loss	(281,369		)	(224,310		)
Total Flowserve Corporation shareholders’ equity	1,716,132			1,890,219
Noncontrolling interest	5,817			4,256
Total equity	1,721,949			1,894,475
Total liabilities and equity	$	4,638,143		$	4,810,958

See accompanying notes to condensed consolidated financial statements.

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FLOWSERVE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



(Amounts in thousands)	Six Months Ended June 30,
	2013			2012
Cash flows – Operating activities:
Net earnings, including noncontrolling interests	$	219,795		$	202,027
Adjustments to reconcile net earnings to net cash (used) provided by operating activities:
Depreciation	43,769			44,340
Amortization of intangible and other assets	7,854			10,172
Net gain (loss) on disposition of assets	347			(10,549		)
Gain on sale of equity investment in affiliate	(12,995		)	—
Gain on remeasurement of acquired assets	(15,315		)	—
Excess tax benefits from stock-based compensation arrangements	(8,399		)	(10,946		)
Stock-based compensation	16,285			15,425
Net earnings from affiliates, net of dividends received	(2,748		)	(4,723		)
Change in assets and liabilities:
Accounts receivable, net	5,892			(13,317		)
Inventories, net	(120,671		)	(155,739		)
Prepaid expenses and other	(9,991		)	(16,617		)
Other assets, net	(2,032		)	(7,219		)
Accounts payable	(94,326		)	(46,763		)
Accrued liabilities and income taxes payable	(69,784		)	49,908
Retirement obligations and other liabilities	7,848			5,140
Net deferred taxes	1,645			(764		)
Net cash flows (used) provided by operating activities	(32,826		)	60,375
Cash flows – Investing activities:
Capital expenditures	(61,159		)	(56,885		)
Proceeds from disposal of assets	336			7,902
Payments for acquisitions, net of cash acquired	(10,143		)	(3,996		)
Proceeds from (contributions to) equity investments in affiliates	46,240			(1,620		)
Net cash flows used by investing activities	(24,726		)	(54,599		)
Cash flows – Financing activities:
Excess tax benefits from stock-based compensation arrangements	8,399			10,946
Payments on long-term debt	(10,000		)	(12,500		)
Short-term financing, net	209,000			300,000
Borrowings under other financing arrangements, net	629			4,826
Repurchases of common shares	(306,317		)	(432,898		)
Payments of dividends	(37,621		)	(37,082		)
Other	(73		)	(460		)
Net cash flows used by financing activities	(135,983		)	(167,168		)
Effect of exchange rate changes on cash	(6,005		)	(751		)
Net change in cash and cash equivalents	(199,540		)	(162,143		)
Cash and cash equivalents at beginning of period	304,252			337,356
Cash and cash equivalents at end of period	$	104,712		$	175,213

See accompanying notes to condensed consolidated financial statements.

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FLOWSERVE CORPORATION

(Unaudited)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


1.	Basis of Presentation and Accounting Policies

Basis of Presentation

The accompanying condensed consolidated balance sheet as of June 30, 2013, the related condensed consolidated statements of income and comprehensive income for the three and six months ended June 30, 2013 and 2012, and the condensed consolidated statements of cash flows for the six months ended June 30, 2013 and 2012, of Flowserve Corporation are unaudited. In management’s opinion, all adjustments comprising normal recurring adjustments necessary for a fair presentation of such condensed consolidated financial statements have been made.

The accompanying condensed consolidated financial statements and notes in this Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2013 ("Quarterly Report") are presented as permitted by Regulation S-X and do not contain certain information included in our annual financial statements and notes thereto. Accordingly, the accompanying condensed consolidated financial information should be read in conjunction with the consolidated financial statements presented in our Annual Report on Form 10-K for the year ended December 31, 2012 ("2012 Annual Report").

On May 23, 2013, our certificate of incorporation was amended to increase the number of authorized shares of common stock from 120.0 million to 305.0 million and enable a three-for-one stock split approved by the Board of Directors on February 7, 2013 in the form of a 200% common stock dividend. The record date for the stock split was June 7, 2013, and additional shares were distributed on June 21, 2013. Shareholders' equity and all share data, including treasury shares and stock-based compensation award shares, and per share data presented herein have been retrospectively adjusted to reflect the impact of the increase in authorized shares and the stock split, as appropriate.

Venezuela – As previously disclosed in our 2012 Annual Report, effective February 13, 2013, the Venezuelan government devalued its currency (bolivar) from 4.3 to 6.3 bolivars to the United States ("U.S.") dollar. Our operations in Venezuela generally consist of a service center that performs service and repair activities. In addition, certain of our operations in other countries sell equipment and parts that are typically denominated in U.S. dollars directly to Venezuelan customers. Our Venezuelan subsidiary's sales for the three and six months ended June 30, 2013 and total assets at June 30, 2013 represented less than 1% of consolidated sales and total assets for the same periods.

As a result of the devaluation, we recognized a loss of $4.0 million in the first quarter of 2013. The loss was reported in other expense, net in our condensed consolidated statement of income and resulted in no tax benefit. We have evaluated the carrying value of related assets and concluded that there is no current impairment. We are continuing to assess and monitor the ongoing impact of the currency devaluation on our Venezuelan operations and imports into the market, including our Venezuelan subsidiary's ability to remit cash for dividends and other payments at the official rate, as well as further actions of the Venezuelan government and economic conditions that may adversely impact our future consolidated financial condition or results of operations.

Accounting Policies

Significant accounting policies, for which no significant changes have occurred in the six months ended June 30, 2013, are detailed in Note 1 to our consolidated financial statements included in our 2012 Annual Report.

Accounting Developments

Pronouncements Implemented

In December 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2011-11, "Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities," which requires enhanced disclosures about financial instruments and derivative instruments that are either (1) offset in accordance with either Accounting Standards Codification ("ASC") 210-20-45, "Balance Sheet - Offsetting," or ASC 815-10-45, "Derivatives and Hedging - Overall," or (2) subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in accordance with either ASC 210-20-45 or ASC 815-10-45. The disclosure requirements shall be applied retrospectively for all periods presented. Our adoption of ASU No. 2011-11, effective January 1, 2013, had no impact on our consolidated financial condition and results of operations.

In January 2013, the FASB issued ASU No. 2013-01, "Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities," which limits the scope of ASU 2011-11 to derivatives, repurchase agreements and securities lending transactions to the extent that they are (1) offset in the financial statements or (2) subject to an enforceable master netting arrangement or similar agreement. The disclosure requirements shall be applied retrospectively for all periods presented. Our

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adoption of ASU No. 2013-01, effective January 1, 2013, had no impact on our consolidated financial condition and results of operations.

In July 2012, the FASB issued ASU No. 2012-02, "Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment," which specifies that an entity has the option to first assess qualitative factors to determine whether it is more likely than not that the asset is impaired. Unless an entity determines that it is more likely than not that the fair value of such an asset is less than its carrying amount, it would not need to calculate the fair value of the asset in that year. Our adoption of ASU No. 2012-02, effective January 1, 2013, had no impact on our consolidated financial condition and results of operations.

In February 2013, the FASB issued ASU No. 2013-02, "Comprehensive Income (Topic 220) - Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income," which requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income, but only if the amount reclassified is required under U.S. Generally Accepted Accounting Principles ("GAAP") to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts. Our adoption of ASU No. 2013-02, effective January 1, 2013, had no impact on our consolidated financial condition and results of operations.

In March 2013, the FASB issued ASU No. 2013-05, "Foreign Currency Matters (Topic 830) - Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity," which specifies that a cumulative translation adjustment should be released into earning when an entity ceases to have a controlling financial interest in a subsidiary or group of assets within a consolidated foreign entity and the sale or transfer results in the complete or substantially complete liquidation of the foreign entity. ASU No. 2013-05 is effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2013. We early adopted this ASU effective January 1, 2013 and it did not have a material impact on our consolidated financial condition and results of operations.

Pronouncements Not Yet Implemented

In February 2013, the FASB issued ASU No. 2013-04, "Liabilities (Topic 405) - Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date," which requires a reporting entity that is jointly and severally liable to measure the obligation as the sum of the amount the entity has agreed with co-obligors to pay and any additional amount it expects to pay on behalf of one or more co-obligors. The scope of this ASU excludes obligations addressed by existing guidance. ASU No. 2013-04 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The ASU shall be applied retrospectively for arrangements existing at the beginning of the year of adoption. Our adoption of ASU No. 2013-04 will not have an impact on our consolidated financial condition and results of operations.

In April 2013, the FASB issued ASU No. 2013-07, "Presentation of Financial Statements (Topic 205) - Liquidation Basis of Accounting," which requires an entity to prepare its financial statements using the liquidation basis of accounting when liquidation is imminent. Liquidation is imminent when the likelihood is remote that the entity will return from liquidation and either (a) a plan for liquidation is approved by the person or persons with the authority to make such a plan effective and the likelihood is remote that the execution of the plan will be blocked by other parties or (b) a plan for liquidation is being imposed by other forces (for example, involuntary bankruptcy). ASU No. 2013-07 is effective for entities that determine liquidation is imminent during annual reporting periods beginning after December 15, 2013, and interim reporting periods therein. The ASU shall be applied prospectively from the day that liquidation becomes imminent. Our adoption of ASU No. 2013-07 will not have an impact on our consolidated financial condition and results of operations.


2.	Exit of Joint Venture

Effective March 28, 2013, we and our joint venture partner agreed to exit our joint venture, Audco India, Limited (“AIL”), which manufactures integrated industrial valves in India. To effect the exit, in two separate transactions, Flow Control Division ("FCD") acquired 100% ownership of AIL's plug valve manufacturing business in an asset purchase for cash of $10.1 million and sold its 50% equity interest in AIL to the joint venture partner for $46.2 million in cash. We remeasured to fair value our previously held equity interest in the purchased net assets of the plug valve manufacturing business resulting in net assets acquired of approximately $25 million and a pre-tax gain of $15.3 million. The sale of our equity interest in AIL resulted in a pre-tax gain of $13.0 million. In the first quarter of 2013, both of the above gains were recorded in net earnings from affiliates in the condensed consolidated statements of income. No pro forma information has been provided due to immateriality. Prior to these transactions, our 50% interest in AIL was recorded using the equity method of accounting.

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3.	Stock-Based Compensation Plans

We maintain the Flowserve Corporation Equity and Incentive Compensation Plan (the "2010 Plan"), which is a shareholder-approved plan authorizing the issuance of up to 8,700,000 shares of our common stock in the form of incentive stock options, non-statutory stock options, restricted shares, restricted share units and performance-based units (collectively referred to as "Restricted Shares"), stock appreciation rights and bonus stock. Of the 8,700,000 shares of common stock authorized under the 2010 Plan, 5,615,934 were available for issuance as of June 30, 2013. In addition to the 2010 Plan, we also maintain the Flowserve Corporation 2004 Stock Compensation Plan (the "2004 Plan"), which was established on April 21, 2004. The 2004 Plan authorizes the issuance of up to 10,500,000 shares of common stock through grants of Restricted Shares, stock options and other equity-based awards. Of the 10,500,000 shares of common stock authorized under the 2004 Plan, 827,835 were available for issuance as of June 30, 2013. No stock options have been granted since 2006.

Restricted Shares – Awards of Restricted Shares are valued at the closing market price of our common stock on the date of grant. The unearned compensation is amortized to compensation expense over the vesting period of the restricted shares. We had unearned compensation of $45.5 million and $30.4 million at June 30, 2013 and December 31, 2012, respectively, which is expected to be recognized over a weighted-average period of approximately two years. These amounts will be recognized into net earnings in prospective periods as the awards vest. The total fair value of Restricted Shares vested during the three months ended June 30, 2013 and 2012 was $1.6 million and $1.2 million, respectively. The total fair value of Restricted Shares vested during the six months ended June 30, 2013 and 2012 was $34.8 million and $36.2 million, respectively.

We recorded stock-based compensation expense of $5.4 million ($8.2 million pre-tax) and $5.1 million ($7.6 million pre-tax) for the three months ended June 30, 2013 and 2012, respectively. We recorded stock-based compensation expense of $10.7 million ($16.3 million pre-tax) and $10.2 million ($15.4 million pre-tax) for the six months ended June 30, 2013 and 2012, respectively.

The following table summarizes information regarding Restricted Shares:



	Six Months Ended June 30, 2013
	Shares		Weighted Average Grant-Date Fair Value
Number of unvested shares:
Outstanding - January 1, 2013	2,376,300		$	37.70
Granted	689,793		52.27
Vested	(1,016,894	)	34.22
Cancelled	(121,886	)	43.58
Outstanding - June 30, 2013	1,927,313		$	44.37

Unvested Restricted Shares outstanding as of June 30, 2013, includes approximately 914,000 units with performance-based vesting provisions. Performance-based units are issuable in common stock and vest upon the achievement of pre-defined performance targets, primarily based on our average annual return on net assets over a three-year period as compared with the same measure for a defined peer group for the same period. Most units were granted in three annual grants since January 1, 2010 and have a vesting percentage between 0% and 200% depending on the achievement of the specific performance targets. Compensation expense is recognized ratably over a cliff-vesting period of 36 months, based on the fair market value of our common stock on the date of grant, as adjusted for anticipated forfeitures. During the performance period, earned and unearned compensation expense is adjusted based on changes in the expected achievement of the performance targets. Vesting provisions range from 0 to approximately 1,825,000 shares based on performance targets. As of June 30, 2013, we estimate vesting of approximately 1,156,000 shares based on expected achievement of performance targets.


4.	Derivative Instruments and Hedges

Our risk management and derivatives policy specifies the conditions under which we may enter into derivative contracts. See Notes 1 and 6 to our consolidated financial statements included in our 2012 Annual Report and Note 7 of this Quarterly Report for additional information on our derivatives. We enter into forward exchange contracts to hedge our cash flow risks associated with transactions denominated in currencies other than the local currency of the operation engaging in the transaction. We have not elected to apply hedge accounting to our forward exchange contracts. At June 30, 2013 and December 31, 2012, we had $577.0 million and $608.9 million, respectively, of notional amount in outstanding forward exchange contracts with third parties. At June 30, 2013, the length of forward exchange contracts currently in place ranged from one day to 23 months. Also as part of our risk management program, we enter into interest rate swap agreements to hedge exposure to floating interest rates on certain portions of our debt. At June 30, 2013 and December 31, 2012, we had $225.0 million and $275.0 million, respectively, of notional

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amount in outstanding interest rate swaps with third parties. All interest rate swaps are highly effective. At June 30, 2013, the maximum remaining length of any interest rate swap contract in place was approximately 24 months.

We are exposed to risk from credit-related losses resulting from nonperformance by counterparties to our financial instruments. We perform credit evaluations of our counterparties under forward exchange contracts and interest rate swap agreements and expect all counterparties to meet their obligations. If necessary, we would adjust the values of our derivative contracts for our or our counterparties’ credit risks. We have not experienced credit losses from our counterparties.

The fair value of forward exchange contracts not designated as hedging instruments are summarized below:



	June 30,		December 31,
(Amounts in thousands)	2013		2012
Current derivative assets	$	5,228	$	6,104
Noncurrent derivative assets	1		104
Current derivative liabilities	7,184		7,814
Noncurrent derivative liabilities	31		12

The fair value of interest rate swaps in cash flow hedging relationships are summarized below:



	June 30,		December 31,
(Amounts in thousands)	2013		2012
Noncurrent derivative assets	$	18	$	—
Current derivative liabilities	905		1,417
Noncurrent derivative liabilities	28		316

Current and noncurrent derivative assets are reported in our condensed consolidated balance sheets in prepaid expenses and other and other assets, net, respectively. Current and noncurrent derivative liabilities are reported in our condensed consolidated balance sheets in accrued liabilities and retirement obligations and other liabilities, respectively.

The impact of net changes in the fair values of forward exchange contracts not designated as hedging instruments are summarized below:



	Three Months Ended June 30,						Six Months Ended June 30,
(Amounts in thousands)	2013			2012			2013			2012
Loss recognized in income	$	(4,534	)	$	(4,522	)	$	(7,531	)	$	(5,641	)

Gains and losses recognized in our condensed consolidated statements of income for forward exchange contracts are classified as other expense, net.

The impact of net changes in the fair values of interest rate swaps in cash flow hedging relationships are summarized in Note 16.


5.	Debt

Debt, including capital lease obligations, consisted of:



	June 30,		December 31,
(Amounts in thousands, except percentages)	2013		2012
3.50% Senior Notes due September 15, 2022 (net of unamortized discount)	$	498,206	$	498,124
Term Loan Facility, interest rate of 1.78% at June 30, 2013 and 1.81% at December 31, 2012, respectively	385,000		395,000
Revolving Credit Facility, interest rate of 1.94% at June 30, 2013	209,000		—
Capital lease obligations and other borrowings	34,878		35,470
Debt and capital lease obligations	1,127,084		928,594
Less amounts due within one year	277,873		59,478
Total debt due after one year	$	849,211	$	869,116

Senior Notes

On September 11, 2012, we completed a public offering of $500.0 million in aggregate principal amount of senior notes due September 15, 2022 ("Senior Notes"). The Senior Notes bear an interest rate of 3.50% per year, payable on March 15 and September 15 of each year, commencing on March 15, 2013. The Senior Notes were priced at 99.615% of par value, reflecting a discount to the aggregate principal amount.

Senior Credit Facility

On August 20, 2012, we entered into a credit agreement with Bank of America, N.A., as swingline lender, letter of credit issuer and administrative agent, and the other lenders party thereto (together, the “Lenders”), providing for term debt and a revolving credit facility. The credit agreement provides for an aggregate commitment of $1.25 billion, including a $400.0 million term loan facility with a maturity date of August 20, 2017 (“Term Loan Facility”) and an $850.0 million revolving credit facility with a maturity date of August 20, 2017 (“Revolving Credit Facility” and, together with the Term Loan Facility, the “Senior Credit Facility”). As of June 30, 2013 we had $209.0 million outstanding under the Revolving Credit Facility. The Revolving Credit Facility includes a $300.0 million sublimit for the issuance of letters of credit and a $30.0 million sublimit for swing line loans. We had outstanding letters of credit of $141.8 million and $152.2 million at June 30, 2013 and December 31, 2012, respectively, which when included with the outstanding Revolving Credit Facility, reduced our borrowing capacity to $499.2 million and $697.8 million, respectively. Subject to certain conditions, we have the right to increase the amount of the Term Loan Facility or the Revolving Credit Facility by an aggregate amount not to exceed $250.0 million. Our obligations under the Senior Credit Facility are guaranteed by certain of our domestic subsidiaries. The Lenders have agreed to release such guarantees if we achieve certain credit ratings. We had not achieved these ratings as of June 30, 2013. Our compliance with applicable financial covenants under the Senior Credit Facility is tested quarterly, and we complied with all covenants at June 30, 2013.

We may prepay loans under our Senior Credit Facility in whole or in part, without premium or penalty, at any time. A commitment fee, which is payable quarterly on the daily unused portions of the Senior Credit Facility, was 0.225% (per annum) during the period ended June 30, 2013. During the six months ended June 30, 2013, we made scheduled repayments of $10.0 million under our Term Loan Facility. We have scheduled repayments of $5.0 million due in the next quarter, $10.0 million in the fourth quarter of 2013 and $10.0 million in each of the first and second quarters of 2014 under our Senior Credit Facility. Our Senior Credit Facility bears a floating rate of interest, and we have entered into $225.0 million of notional amount of interest rate swaps at June 30, 2013 to hedge exposure to floating interest rates.

Bridge Loan

On June 15, 2012, we entered into a loan agreement with JPMorgan Chase Bank, N.A., as administrative agent, and the other lenders party thereto, providing for a term loan with an aggregate commitment of $250.0 million for a term of 364 days (“Bridge Loan”). The proceeds from the Bridge Loan were used to fund our share repurchase program described in Note 13 to our condensed consolidated financial statements included in this Quarterly Report. The Bridge Loan was repaid in its entirety in the third quarter of 2012 using a portion of the net proceeds from the Senior Notes offering.

European Letter of Credit Facility

We maintain a 364-day unsecured, committed €125.0 million European Letter of Credit Facility ("European LOC Facility") that is renewable annually and is used for contingent obligations in respect of surety and performance bonds, bank guarantees and similar obligations with maturities up to five years. We renewed the European LOC Facility in October 2012 for an additional 364-day period and amended certain provisions to conform to those in our Senior Credit Facility and Senior Notes. We had outstanding letters of credit drawn on the European LOC Facility of €83.0 million ($108.0 million) and €63.1 million ($83.3 million) as of June 30, 2013 and December 31, 2012, respectively.


6.	Supplemental Guarantor Financial Information

On September 11, 2012, we completed a public offering of Senior Notes that are fully and unconditionally and jointly and severally guaranteed by certain of our 100% owned domestic subsidiaries. The following condensed consolidating financial statements present the financial position, results of operations and cash flows of Flowserve Corporation (referred to as “Parent” for the purpose of this note only) on a Parent−only (Issuer) basis, the combined guarantor subsidiaries on a guarantor−only basis, the combined non-guarantor subsidiaries on a non-guarantor-only basis and elimination adjustments necessary to arrive at the information for the Parent, guarantor subsidiaries and non-guarantor subsidiaries on a condensed consolidated basis. Investments in subsidiaries have been accounted for using the equity method for this presentation.

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FLOWSERVE CORPORATION

CONDENSED CONSOLIDATING STATEMENTS OF INCOME



	Three Months Ended June 30, 2013
	Parent (Issuer)			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated Total
(Amounts in thousands)
Sales	$	—		$	492,643		$	842,124		$	(95,241	)	$	1,239,526
Cost of sales	—			(321,255		)	(591,936		)	95,241			(817,950		)
Gross profit	—			171,388			250,188			—			421,576
Selling, general and administrative expense	(1,724		)	(69,928		)	(168,548		)	—			(240,200		)
Net earnings from affiliates	—			176			1,969			—			2,145
Net earnings from consolidated subsidiaries, net of tax	126,771			65,156			—			(191,927		)	—
Operating income	125,047			166,792			83,609			(191,927		)	183,521
Interest expense, net	(7,233		)	(2,981		)	(2,634		)	—			(12,848		)
Other (expense) income, net	—			(1,708		)	2,324			—			616
Earnings before income taxes	117,814			162,103			83,299			(191,927		)	171,289
Provision for income taxes	2,572			(35,332		)	(17,635		)	—			(50,395		)
Net earnings, including noncontrolling interests	120,386			126,771			65,664			(191,927		)	120,894
Less: Net earnings attributable to noncontrolling interests	—			—			(508		)	—			(508		)
Net earnings attributable to Flowserve Corporation	$	120,386		$	126,771		$	65,156		$	(191,927	)	$	120,386
Comprehensive income attributable to Flowserve Corporation	$	94,249		$	95,295		$	31,795		$	(127,090	)	$	94,249



	Three Months Ended June 30, 2012
	Parent (Issuer)			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated Total
(Amounts in thousands)
Sales	$	—		$	457,165		$	815,552		$	(90,492	)	$	1,182,225
Cost of sales	—			(303,806		)	(584,309		)	90,492			(797,623		)
Gross profit	—			153,359			231,243			—			384,602
Selling, general and administrative expense	(1,861		)	(95,145		)	(126,886		)	—			(223,892		)
Net earnings from affiliates	—			635			3,451			—			4,086
Net earnings from consolidated subsidiaries, net of tax	109,167			74,995			—			(184,162		)	—
Operating income	107,306			133,844			107,808			(184,162		)	164,796
Interest expense, net	(747		)	(4,919		)	(3,019		)	—			(8,685		)
Other income (expense), net	—			1,185			(9,231		)	—			(8,046		)
Earnings before income taxes	106,559			130,110			95,558			(184,162		)	148,065
Provision for income taxes	757			(20,943		)	(19,394		)	—			(39,580		)
Net earnings, including noncontrolling interests	107,316			109,167			76,164			(184,162		)	108,485
Less: Net earnings attributable to noncontrolling interests	—			—			(1,169		)	—			(1,169		)
Net earnings attributable to Flowserve Corporation	$	107,316		$	109,167		$	74,995		$	(184,162	)	$	107,316
Comprehensive income attributable to Flowserve Corporation	$	51,353		$	53,115		$	17,933		$	(71,048	)	$	51,353

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	Six Months Ended June 30, 2013
	Parent (Issuer)			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated Total
(Amounts in thousands)
Sales	$	—		$	940,221		$	1,573,510		$	(177,609	)	$	2,336,122
Cost of sales	—			(610,220		)	(1,108,627		)	177,609			(1,541,238		)
Gross profit	—			330,001			464,883			—			794,884
Selling, general and administrative expense	(2,063		)	(162,716		)	(309,929		)	—			(474,708		)
Net earnings from affiliates	—			400			33,424			—			33,824
Net earnings from consolidated subsidiaries, net of tax	229,328			125,433			—			(354,761		)	—
Operating income	227,265			293,118			188,378			(354,761		)	354,000
Interest expense, net	(13,733		)	(5,760		)	(5,172		)	—			(24,665		)
Other expense, net	—			(3,382		)	(7,030		)	—			(10,412		)
Earnings before income taxes	213,532			283,976			176,176			(354,761		)	318,923
Provision for income taxes	4,644			(54,648		)	(49,124		)	—			(99,128		)
Net earnings, including noncontrolling interests	218,176			229,328			127,052			(354,761		)	219,795
Less: Net earnings attributable to noncontrolling interests	—			—			(1,619		)	—			(1,619		)
Net earnings attributable to Flowserve Corporation	$	218,176		$	229,328		$	125,433		$	(354,761	)	$	218,176
Comprehensive income attributable to Flowserve Corporation	$	161,118		$	264,467		$	159,285		$	(423,752	)	$	161,118



	Six Months Ended June 30, 2012
	Parent (Issuer)			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated Total
(Amounts in thousands)
Sales	$	—		$	892,911		$	1,535,573		$	(171,279	)	$	2,257,205
Cost of sales	—			(589,956		)	(1,094,743		)	171,279			(1,513,420		)
Gross profit	—			302,955			440,830			—			743,785
Selling, general and administrative expense	(2,981		)	(195,374		)	(247,426		)	—			(445,781		)
Net earnings from affiliates	—			1,955			7,360			—			9,315
Net earnings from consolidated subsidiaries, net of tax	203,517			134,605			—			(338,122		)	—
Operating income	200,536			244,141			200,764			(338,122		)	307,319
Interest expense, net	(1,348		)	(9,377		)	(6,487		)	—			(17,212		)
Other income (expense), net	—			1,849			(14,834		)	—			(12,985		)
Earnings before income taxes	199,188			236,613			179,443			(338,122		)	277,122
Provision for income taxes	1,253			(33,096		)	(43,252		)	—			(75,095		)
Net earnings, including noncontrolling interests	200,441			203,517			136,191			(338,122		)	202,027
Less: Net earnings attributable to noncontrolling interests	—			—			(1,586		)	—			(1,586		)
Net earnings attributable to Flowserve Corporation	$	200,441		$	203,517		$	134,605		$	(338,122	)	$	200,441
Comprehensive income attributable to Flowserve Corporation	$	179,236		$	182,603		$	111,396		$	(293,999	)	$	179,236

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FLOWSERVE CORPORATION

CONDENSED CONSOLIDATING BALANCE SHEETS



	June 30, 2013
	Parent (Issuer)		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations			Consolidated Total
(Amounts in thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	1,288	$	—	$	103,424	$	—		$	104,712
Accounts receivable, net	—		248,729		831,511		—			1,080,240
Intercompany receivables	4,470		138,187		59,889		(202,546		)	—
Inventories, net	—		405,845		778,397		—			1,184,242
Other current assets, net	1,760		124,828		116,084		—			242,672
Total current assets	7,518		917,589		1,889,305		(202,546		)	2,611,866
Property, plant and equipment, net	—		202,243		457,876		—			660,119
Goodwill	—		671,858		374,100		—			1,045,958
Intercompany receivables	462,500		9,467		105,741		(577,708		)	—
Investment in consolidated subsidiaries	2,344,971		1,603,367		—		(3,948,338		)	—
Other assets, net	13,342		174,782		132,076		—			320,200
Total assets	$	2,828,331	$	3,579,306	$	2,959,098	$	(4,728,592	)	$	4,638,143

LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	—	$	144,827	$	381,289	$	—		$	526,116
Intercompany payables	57		64,302		138,187		(202,546		)	—
Accrued liabilities	11,740		246,224		547,965		—			805,929
Debt due within one year	244,000		15		33,858		—			277,873
Deferred taxes	—		—		10,172		—			10,172
Total current liabilities	255,797		455,368		1,111,471		(202,546		)	1,620,090
Long-term debt due after one year	848,206		—		1,005		—			849,211
Intercompany payables	1,144		567,097		9,467		(577,708		)	—
Retirement obligations and other liabilities	7,052		211,870		227,971					446,893
Total liabilities	1,112,199		1,234,335		1,349,914		(780,254		)	2,916,194
Total Flowserve Corporation shareholders’ equity	1,716,132		2,344,971		1,603,367		(3,948,338		)	1,716,132
Noncontrolling interest	—		—		5,817		—			5,817
Total equity	1,716,132		2,344,971		1,609,184		(3,948,338		)	1,721,949
Total liabilities and equity	$	2,828,331	$	3,579,306	$	2,959,098	$	(4,728,592	)	$	4,638,143

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	December 31, 2012
	Parent (Issuer)		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations			Consolidated Total
(Amounts in thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	2,609	$	—	$	301,643	$	—		$	304,252
Accounts receivable, net	—		255,164		848,560		—			1,103,724
Intercompany receivables	—		157,447		42,836		(200,283		)	—
Inventories, net	—		382,360		704,303		—			1,086,663
Other current assets, net	1,967		123,152		120,458		—			245,577
Total current assets	4,576		918,123		2,017,800		(200,283		)	2,740,216
Property, plant and equipment, net	—		204,032		450,147		—			654,179
Goodwill	—		671,858		381,994		—			1,053,852
Intercompany receivables	462,500		10,363		85,316		(558,179		)	—
Investment in consolidated subsidiaries	2,321,597		1,604,462		—		(3,926,059		)	—
Other assets, net	14,879		175,771		172,061		—			362,711
Total assets	$	2,803,552	$	3,584,609	$	3,107,318	$	(4,684,521	)	$	4,810,958

LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	—	$	158,028	$	458,872	$	—		$	616,900
Intercompany payables	35		42,801		157,447		(200,283		)	—
Accrued liabilities	11,610		314,162		580,821		—			906,593
Debt due within one year	25,000		5		34,473		—			59,478
Deferred taxes	—		—		7,654		—			7,654
Total current liabilities	36,645		514,996		1,239,267		(200,283		)	1,590,625
Long-term debt due after one year	868,124		20		972		—			869,116
Intercompany payables	1,144		546,672		10,363		(558,179		)	—
Retirement obligations and other liabilities	7,420		201,324		247,998		—			456,742
Total liabilities	913,333		1,263,012		1,498,600		(758,462		)	2,916,483
Total Flowserve Corporation shareholders’ equity	1,890,219		2,321,597		1,604,462		(3,926,059		)	1,890,219
Noncontrolling interest	—		—		4,256		—			4,256
Total equity	1,890,219		2,321,597		1,608,718		(3,926,059		)	1,894,475
Total liabilities and equity	$	2,803,552	$	3,584,609	$	3,107,318	$	(4,684,521	)	$	4,810,958

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FLOWSERVE CORPORATION

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS



	Six Months Ended June 30, 2013
	Parent (Issuer)			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated Total
(Amounts in thousands)
Net cash flows provided (used) by operating activities	$	143,558		$	132,215		$	(155,904	)	$	(152,695	)	$	(32,826	)
Cash flows — Investing activities:
Capital expenditures	—			(17,817		)	(43,342		)	—			(61,159		)
Payments for acquisitions, net of cash acquired	—			—			(10,143		)	—			(10,143		)
Intercompany loan proceeds	—			911			56,332			(57,243		)	—
Intercompany loan payments	—			(15		)	(76,757		)	76,772			—
Proceeds from disposition of assets	—			73			263			—			336
Affiliate investment activity, net	—			—			46,240			—			46,240
Net cash flows used by investing activities	—			(16,848		)	(27,407		)	19,529			(24,726		)
Cash flows — Financing activities:
Excess tax benefits from stock-based payment arrangements	—			6,578			1,821			—			8,399
Payments on long-term debt	(10,000		)	—			—			—			(10,000		)
Short-term financing, net	209,000			—			—			—			209,000
Borrowings under other financing arrangements, net	—			(10		)	639			—			629
Repurchases of common shares	(306,317		)	—			—			—			(306,317		)
Payments of dividends	(37,621		)	—			—			—			(37,621		)
Payments of deferred loan costs	—			—			—			—			—
Intercompany loan proceeds	—			76,757			15			(76,772		)	—
Intercompany loan payments	—			(56,332		)	(911		)	57,243			—
Intercompany dividends	—			(142,360		)	(10,335		)	152,695			—
All other financing, net	59			—			(132		)	—			(73		)
Net cash flows (used) provided by financing activities	(144,879		)	(115,367		)	(8,903		)	133,166			(135,983		)
Effect of exchange rate changes on cash	—			—			(6,005		)	—			(6,005		)
Net change in cash and cash equivalents	(1,321		)	—			(198,219		)	—			(199,540		)
Cash and cash equivalents at beginning of period	2,609			—			301,643			—			304,252
Cash and cash equivalents at end of period	$	1,288		$	—		$	103,424		$	—		$	104,712

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	Six Months Ended June 30, 2012
	Parent (Issuer)			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated Total
(Amounts in thousands)
Net cash flows (used) provided by operating activities	$	47,299		$	77,790		$	(6,189	)	$	(58,525	)	$	60,375
Cash flows — Investing activities:
Capital expenditures	—			(15,334		)	(41,551		)	—			(56,885		)
Payments for acquisitions, net of cash acquired	—			—			(3,996		)	—			(3,996		)
Intercompany loan proceeds	—			—			—			—			—
Intercompany loan payments	—			(22,409		)	—			22,409			—
Proceeds from disposition of assets	—			74			7,828			—			7,902
Affiliate investment activity, net	—			—			(1,620		)	—			(1,620		)
Net cash flows used by investing activities	—			(37,669		)	(39,339		)	22,409			(54,599		)
Cash flows — Financing activities:
Excess tax benefits from stock-based payment arrangements	—			8,728			2,218			—			10,946
Payments on long-term debt	(12,500		)	—			—			—			(12,500		)
Short-term financing, net	300,000			—			—			—			300,000
(Payments) borrowings under other financing arrangements, net	—			(10		)	4,836			—			4,826
Repurchases of common shares	(432,898		)	—			—			—			(432,898		)
Payments of dividends	(37,082		)	—			—			—			(37,082		)
Intercompany loan proceeds	—			—			22,409			(22,409		)	—
Intercompany dividends	—			(48,839		)	(9,686		)	58,525			—
All other financing, net	(248		)	—			(212		)	—			(460		)
Net cash flows (used) provided by financing activities	(182,728		)	(40,121		)	19,565			36,116			(167,168		)
Effect of exchange rate changes on cash	—			—			(751		)	—			(751		)
Net change in cash and cash equivalents	(135,429		)	—			(26,714		)	—			(162,143		)
Cash and cash equivalents at beginning of period	150,308			—			187,048			—			337,356
Cash and cash equivalents at end of period	$	14,879		$	—		$	160,334		$	—		$	175,213


7.	Fair Value

Our financial instruments are presented at fair value in our condensed consolidated balance sheets. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models may be applied. Assets and liabilities recorded at fair value in our condensed consolidated balance sheets are categorized by hierarchical levels based upon the level of judgment associated with the inputs used to measure their fair values. Recurring fair value measurements are limited to investments in derivative instruments and certain equity securities. The fair value measurements of our derivative instruments are determined using models that maximize the use of the observable market inputs including interest rate curves and both forward and spot prices for currencies, and are classified as Level II under the fair value hierarchy. The fair values of our derivatives are included in Note 4. The fair value measurements of our investments in equity securities are determined using quoted market prices and are classified as Level I. The fair values of our investments in equity securities, and changes thereto, are immaterial to our consolidated financial position and results of operations.

The fair value of our debt, excluding the Senior Notes, was estimated using interest rates on similar debt recently issued by companies with credit metrics similar to ours and is classified as Level II under the fair value hierarchy. The carrying value of our debt is included in Note 5 and, except for the Senior Notes, approximates fair value. The estimated fair value of our Senior Notes at June 30, 2013 was $476.1 million compared to the carrying value of $498.2 million. The estimated fair value of the Senior Notes is based on Level I quoted market rates. The carrying amounts of our other financial instruments (i.e., cash and cash

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equivalents, accounts receivable, net and accounts payable) approximated fair value due to their short-term nature at June 30, 2013 and December 31, 2012.


8.	Inventories

Inventories, net consisted of the following:



	June 30,			December 31,
(Amounts in thousands)	2013			2012
Raw materials	$	380,605		$	351,705
Work in process	842,104			798,662
Finished goods	297,665			288,160
Less: Progress billings	(257,611		)	(275,611		)
Less: Excess and obsolete reserve	(78,521		)	(76,253		)
Inventories, net	$	1,184,242		$	1,086,663


9.	Equity Method Investments

We occasionally enter into joint venture arrangements with local country partners as our preferred means of entry into countries where barriers to entry may exist. Similar to our consolidated subsidiaries, these unconsolidated joint ventures generally operate within our primary businesses of designing, manufacturing, assembling and distributing fluid motion and control products and services. We have agreements with certain of these joint ventures that restrict us from otherwise entering the respective market and certain joint ventures produce and/or sell our products as part of their broader product offering. Net earnings from investments in unconsolidated joint ventures is reported in net earnings from affiliates in our condensed consolidated statements of income. Given the integrated role of the unconsolidated joint ventures in our business, net earnings from affiliates is presented as a component of operating income.

As discussed in Note 2, effective March 28, 2013, we and our joint venture partner agreed to exit our AIL joint venture, a manufacturer of integrated industrial valves in India. Prior to these transactions, our 50% interest was recorded using the equity method of accounting. As of June 30, 2013, we had investments in seven joint ventures (one located in each of India, Japan, Saudi Arabia, South Korea and the United Arab Emirates and two located in China) that were accounted for using the equity method.

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10.	Earnings Per Share

The following is a reconciliation of net earnings of Flowserve Corporation and weighted average shares for calculating net earnings per common share. Earnings per weighted average common share outstanding was calculated as follows:



	Three Months Ended June 30,
(Amounts in thousands, except per share data)	2013		2012
Net earnings of Flowserve Corporation	$	120,386	$	107,316
Dividends on restricted shares not expected to vest	3		4
Earnings attributable to common and participating shareholders	$	120,389	$	107,320
Weighted average shares:
Common stock	141,524		161,221
Participating securities	688		765
Denominator for basic earnings per common share	142,212		161,986
Effect of potentially dilutive securities	670		811
Denominator for diluted earnings per common share	142,882		162,797
Earnings per common share:
Basic	$	0.85	$	0.66
Diluted	0.84		0.66



	Six Months Ended June 30,
(Amounts in thousands, except per share data)	2013